Another possible tailwind for the bonds is that Fannie Mae and Freddie Mac are separately considering changing the structure of the securities to make them more appealing to real estate investment trusts. REITs have bought about 10 percent of the riskier mezzanine portion of CRT bonds issued by Fannie Mae this year, and as much as 23 percent of slices of Freddie Mac offerings this year, according to data from the GSEs. The REIT changes would shift the way they desginate and document loans, which would also reduce taxes on the securities for overseas investors. That may spur demand from funds domiciled abroad.
The securities’ successful year has some investors hunting for opportunities elsewhere. Gene Tannuzzo, a money manager at Columbia Threadneedle, which manages $484 billion, said that after watching the bonds rally, he’s been locking in gains on the securities and looking at opportunities in non-performing and re-performing loan market instead.
"It’s too tight," Tannuzzo said. "We felt a little more comfortable earlier on."
Investors’ faith in the product was tested earlier this year during Hurricane Harvey and Hurricane Irma. Jittery holders sparked a selloff across the debt, though most of the bonds have since bounced back. Payments reports on the bonds in 2018 may calm investors, according to Bank of America analysts led by Chris Flanagan. The bank expects hurricane-related losses to total less than 0.02 percent on the bonds because most affected homes had wind and flood insurance.
"Given global warming, I think the hurricane season is a little scary for this sector," said Tracy Chen, head of structured credit at Brandywine Global, which manages $74 billion.
Even so, she says she’s expecting another robust year for the securities, assuming fixed-income assets generally remain strong. "If high-yield and emerging markets continue to tighten, I don’t see any reason CRT can’t continue to tighten as well," Chen said.
This article was provided by Bloomberg News.