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Ginnie Mae TBAs Ignore the Bond Market Rally

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Ginnie Mae and the TBA market

The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker makes a Veterans Affairs or Federal Housing Authority loan, that loan is securitized and put into a Ginnie Mae TBA.

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 like that. As a result, a Ginnie Mae MBS trades at a premium compared to a Fannie Mae TBA.

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Ginnie Mae TBAs unchanged for the week

The ten-year bond yield, tradable through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 8 basis points last week. Ginnie Mae TBAs were unchanged at 105 9/32.

Mortgage REITs are big users of TBAs because they can raise or lower exposure 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 higher-coupon TBAs’ underperformance. The rate of prepayments is driving these trades. Non-agency REITs such as Two Harbors Investment (TWO) aren’t big TBA holders either.

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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