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 mortgage-backed securities’ holdings for fear of raising mortgage rates too much.
Mortgage rates finally acknowledge the bond market rally
Lately, mortgage rates have 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.
Lately, mortgage rates mainly ignored bond market movements. However, they started catching up. Last week, they fell by 7 basis points to 3.69%. The ten-year bond yield fell from 1.92% to 1.84%. 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 Holdings (NSM) and Wells Fargo (WFC) are hoping 2016 is the year the Millennial generation starts buying homes. They’re dreading the inevitable decline in refinance activity as rates rise, but they’re hoping the purchase business continues to improve.
The fall in prepayment speeds should 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 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).