Fannie Mae and the TBA market
When the Federal Reserve talks about buying mortgage-backed securities (or MBS), it’s referring to the to-be-announced (or TBA) market. The TBA market allows loan originators to take individual loans and turn them into a homogeneous product that you can trade. TBAs settle once a month.
Fannie Mae loans go into Fannie Mae securities. TBAs are broken out by coupon rate and settlement date. In the chart above, we see Fannie Mae’s 3.5% coupon for May delivery.
TBA market sells off along with bonds
Fannie Mae TBAs started the week at 104 30/32 and picked up ten ticks to close at 105 8/32. The 10-year yield decreased 8 basis points.
Implications for mortgage REITs
Mortgage real estate investment trusts (or REITs) and ETFs, like Annaly Capital Management (NLY), American Capital Agency (AGNC), and MFA Financial (MFA), are the biggest non-central bank holders of TBAs. They use the TBA market as a vehicle to quickly increase and decrease exposure to MBS. TBAs are highly liquid and much easier to trade than a portfolio of older existing MBS.
In general, you can consider mortgage REITs to be among the biggest lenders in the mortgage market. When TBAs rally, it means capital gains for mortgage REITs. These gains increase TBAs’ returns, especially when added to their interest income.
You should take caution, however. Because REITs use leverage, volatility in interest rates can work against them. We saw American Capital Agency report recently, and despite a huge rally in bonds in the fourth quarter, its book value per share only increased by a small amount. Similarly, we saw Annaly Capital make few adjustments to its investment portfolio.
Investors interested in trading in 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 ETF (TLT).