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 June delivery.
Fannie Mae TBAs rose with the bond market
For the week ending May 20, 2016, Fannie Mae TBAs ended at 104 19/32—down 10 ticks for the week. The ten-year bond yield, tradable through the iShares 20+ Year Treasury Bond ETF (TLT), rose by 14 basis points to 1.84%.
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 increase and decrease exposure to MBS.
TBAs are highly liquid and much easier to trade than a portfolio of older MBS. Non-agency REITs such as Two Harbors Investment (TWO) are less likely to trade TBAs. Investors interested in exposure to 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 TBAs’ returns, especially when added to their interest income.
In the final part of our series, we’ll look at Ginnie Mae TBAs.