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Mortgage Rates Rise as Bond Yields Increase

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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 mortgage-backed securities’ holdings. It doesn’t want to raise mortgage rates too much.

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Mortgage rates rose as bond yields rose

Lately, mortgage rates and bond yields have only been weakly correlated. Last week, they rose by 1 basis point to 3.7%. The ten-year bond yield rose to 1.9%. 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 that 2016 is the year the Millennial generation starts buying homes. They’re dreading the inevitable decline in refinancing 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).

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