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Mortgage Rates Rose as Bond Yields Increased

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Critical input for the housing market

Mortgage rates are the lifeblood of the housing market. The Fed’s plan to help the housing market started when it pushed rates lower to allow people to refinance. The central bank hoped that lowering mortgage rates would also support home prices.

Quantitative easing was a key part of that effort. The Fed is reluctant to sell its MBS (mortgage-backed securities) holdings for fear of raising mortgage rates too much.

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Bonds sell off while mortgage rates fall

Lately, mortgage rates tended to fade big moves in the bond market. When rates fall well below 1.9% on the ten-year bond, mortgage rates fall slightly. Similarly, when rates rise to 2.3%, mortgage rates tend to rise slightly.

Mortgage rates have largely ignored the moves in the bond markets. In the week ended December 25, they rose by 9 basis points while the ten-year bond yield rose from 2.20% to 2.24%. Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).

Impact on mortgage REITs

At this point, mortgage bankers like Nationstar Mortgage (NSM) and Wells Fargo (WFC) are looking forward to 2016. The MBA (Mortgage Bankers Association) put out the initial estimates for 2016. It’s predicting improvement in the purchase business, but a continuing fall in the refinance business as the rates rise.

The fall in the prepayment speeds would be good news for mortgage REITs like Annaly Capital Management (NLY) and American Capital Agency (AGNC). They’re highly-leveraged agency REITs with a lot of prepayment exposure. Non-agency REITs like Redwood Trust (RWT) tend to swap the interest rate risk for credit risk.

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

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