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Ginnie Mae TBAs Underperform Fannie Mae TBAs Again

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Ginnie Mae and the to-be-announced market

The Fannie Mae to-be-announced (or TBA) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go, such as the Federal Housing Administration (or FHA) and Veterans Affairs (or VA) loans.

The biggest difference between a Fannie Mae mortgage-backed security (or MBS) and a Ginnie Mae MBS is that Ginnies have an explicit guarantee from the federal government. Fannies don’t have a guarantee, just a “wink-wink, nudge-nudge” guarantee. As a result, Ginnie Mae MBS trade at a premium compared to Fannie Mae TBAs.

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Ginnie Mae TBAs underperform Fannie Mae TBAs again

The ten-year bond yield decreased 18 basis points, with yields decreasing from 1.11% to 1.93%. Ginnie Mae TBAs picked up 18 ticks, while Fannie Mae TBAs picked up 24 ticks. Ginnie Mae TBAs may be back to their old tricks of underperforming Fannie Mae TBAs based on changing prepayment assumptions.

Investors have been switching out of Ginnie Mae TBAs and into Fannie Mae TBAs. Mortgage REITs are big users of TBAs in that they can increase or decrease exposure very quickly. While older MBS issues can become illiquid, there’s always a large, liquid market in TBAs. As a result, big moves by REITs will affect the TBA market. Perhaps the adjustment was overdone, making Ginnie Mae TBAs cheaper than Fannies.

Implications for mortgage REITs

Mortgage real estate investment trusts (or REITs)—such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC)—are big holders of Ginnie Mae TBAs. In the fourth quarter, American Capital Agency moved down aggressively in coupon in its TBA portfolio. This move accounts for some of the underperformance of the higher-coupon TBAs. Prepayment speeds are driving these trades.

Investors interested in trading the mortgage REIT sector via an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors who are interested in making directional bets on interest rates should look at the iShares 20-year bond fund (TLT).

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