Mortgage-backed securities and Treasury rates

Bond markets across the risk spectrum—including Treasuries (TLT) and mortgage-backed security ETFs (MBB)—posted gains in the first four months of 2013. Between January 4, 2013, and May 3, 2013, the interest rate for the 30-year conventional mortgage kept near record lows, coming in at 3.35%, while market yields for 30-year and ten-year Treasury securities dropped 18 basis points, or bps, and 17 bps—to 2.87% and 1.7%, respectively, over the same period.

Key drivers for mortgage and Treasury rates in early 2013

January to April 2013 saw the iShares MBS ETF (MBB) and the iShares 10-20 Year Treasury Bond ETF (TLH) clocking in price gains of 0.7% and 2.7%, respectively. The first ETF tracks the Barclays Capital U.S. MBS Index, which measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of the Government National Mortgage Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (Fannie Mae or FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). The iShares 10-20 Year Treasury Bond ETF (TLH) tracks the Barclays Capital 10-20 year US Treasury Bond Index, which measures the performance of U.S. Treasury securities that have a remaining maturity of at least ten years and less than 20 years.

The iShares 20+ Year Treasury Bond (TLT) ETF tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index that measures the performance of U.S. Treasury securities with a remaining maturity of at least 20 years. This ETF posted a gain of 3.6% over the period. Other things remaining constant, longer-term bonds experience greater price increases for decreases in yield, and vice versa. The performance of TLT and TLH proves this principle.

To learn more about why interest rates stayed at record lows in the first four months of 2013, move on to Part 3 of this series.

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