(Bloomberg News) Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates soared to the highest levels in almost four months, suggesting borrowing costs may jump from about record lows.
Fannie Mae's current-coupon 30-year bonds climbed 0.16 percentage point to 3.17 percent as of 2 p.m. in New York, the highest since Nov. 28 after an increase of 0.12 percentage point yesterday as the Federal Reserve raised its assessment of the U.S. economy, according to data compiled by Bloomberg.
Mortgage-bond yields rose faster than those of benchmark Treasuries as the Fed's statement signaled a reduced likelihood of a third round of so-called quantitative easing and higher odds that the central bank will raise its benchmark for short- term rates earlier than expected. Mortgage-securities prices fell more than Treasuries on diminished speculation the Fed would target the housing debt with additional asset purchases and as rising rates extended the notes' duration.
"In a move like this, mortgages are supposed to underperform," Dave Cannon, co-head of mortgage-bond trading at RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview today.
Fannie Mae's 3 percent 30-year securities fell 0.33 cent on the dollar more than similar-duration Treasuries, following underperformance of 0.09 cent yesterday, Bloomberg data show. The difference between yields on a Bloomberg index for Fannie Mae current-coupon bonds and 10-year Treasuries rose to 0.91 percentage point, from 0.85 percentage point on March 12. The measure includes the 3 percent securities and reflects debt that most influences rates because it trades closest to face value.
As rates increase, the projected lives of mortgage bonds and loan-servicing contracts extend, partly because potential refinancing by homeowners declines. Investors and servicers then have portfolios with longer-than-expected durations, which may prompt them to sell mortgage bonds, longer-dated Treasuries or interest-rate swaps. Those sales can send yields higher.
Yields may need to increase by an additional 0.20 to 0.25 percentage point "to kick off significant MBS extension flows," Anish Lohokare, an analyst at BNP Paribas SA, wrote today in a note to clients.
The average rate on a typical 30-year fixed-rate mortgage was 3.88 percent last week, or 0.01 percentage point higher than the record low last month, according to Freddie Mac surveys. Borrowing costs last year reached as high as 5.05 percent in February 2011.
Yields on agency mortgage bonds are now guiding rates on almost all new U.S. home lending following the collapse of the non-agency market in 2007 and a retreat by banks. The $5.4 trillion market includes securities guaranteed by government- supported Fannie Mae and Freddie Mac and bonds of federally insured loans guaranteed by U.S.-owned Ginnie Mae.
Borrowing costs may not rise as much as bond yields because lenders might seek to maintain the volume of their business in a mortgage refinancing boom and allow profit margins to drop.