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Fannie Mae TBAs Rally with the Bond Market

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Fannie Mae and the TBA market

When the Fed 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. Also, TBAs are broken down by coupon rate and settlement date. In the above graph, you can see Fannie Mae’s 3.5% coupon for February delivery.

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Fannie Mae TBAs rose by 2 ticks

For the week ending January 29, Fannie Mae TBAs ended at 104 22/32. They rose by 2 ticks to go out at 104 24/32 last week. The ten-year bond yield, tradable through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 8 basis points.

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 raise and lower exposure to MBS.

TBAs are highly liquid and much easier to trade than a portfolio of older MBS. Also, 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 can 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 rise, mortgage REITs see capital gains. These gains raise TBA returns, especially when added to their interest income.

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

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