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Ginnie Mae TBAs Almost Unchanged Last Week: Implications for REITs

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Ginnie Mae and the to-be-announced market

The Fannie Mae TBA (to-be-announced) 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, including the Federal Housing Administration and Veterans Affairs loans.

The biggest difference between a Fannie Mae MBS (mortgage-backed security) 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, a Ginnie Mae MBS trades at a premium compared to a Fannie Mae TBA.

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Ginnie Mae TBAs lose 2 ticks

The ten-year bond yield, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 8 basis points last week. Like the Fannie Mae TBAs, the Ginnie Mae TBAs were more or less “unch’d” (unchanged) for the week.

Mortgage REITs are big users of TBAs because they can increase or decrease exposure very quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs.

Implications for mortgage REITs

Mortgage 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. The rate of prepayments is driving these trades. Non-agency REITs such as Two Harbors (TWO) aren’t big TBA holders.

Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Capped ETF (REM).

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