Fannie Mae TBAs Sell Off with the Bond Market



Fannie Mae and the to-be-announced market

When the Federal Reserve talks about buying MBS (mortgage-backed securities), it’s referring to the TBA (to-be-announced) market. The TBA market allows loan originators to take individual loans and turn them into a homogeneous product they can trade. TBAs settle once a month.

Fannie Mae loans go into Fannie Mae securities. TBAs are broken down by coupon rate and settlement date. In the above chart, we see Fannie Mae’s 3.5% coupon for October delivery.

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Fannie Mae TBAs fall by a quarter of a point

Fannie Mae TBAs ended the prior week at 104 4/32 and gave up about a quarter of a point to go out at 104 4/32. The ten-year bond yield, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT), rose by 53 basis points. Interestingly, as we saw in Part 4 of this series, mortgage rates didn’t move.

Implications for mortgage REITs 

Mortgage REITs and ETFs, including 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 MBS. Non-agency REITs such as Two Harbors Investment (TWO) are less likely to trade TBAs.

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

In general, you can consider mortgage REITs among the biggest lenders in the mortgage market. When TBAs rally, mortgage REITs see capital gains. These gains increase TBA returns, especially when added to their interest income.

You should be careful, however, because REITs use leverage and volatility in interest rates to work against them.


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