The Fed taper may also see an increase in home mortgage rates
Asset managers believe the yield spread between U.S. mortgage bonds and Treasuries will continue to widen as the Federal Reserve implements its plans to shrink its balance sheet, according to a Bloomberg report.
The projections of increasing yield spread came as the Fed announced plans to begin reducing its balance sheet by cutting investments in mortgage bonds and Treasuries. The Fed began buying mortgage bonds in January 2009 amid a surge in the mortgage spread. Its upcoming reductions are set to end its efforts to pump money into the U.S. home-lending market by buying mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae.
Currently, the Fed holds more than a quarter of all agency mortgage-backed securities, which total $6.86 trillion, and 18% of the publicly traded Treasuries market. It plans to begin the reduction with $6 billion of Treasuries and $4 billion of mortgage securities per month. These figures are planned to slowly increase to $30 billion and $20 billion, respectively, Bloomberg reported.
“It would not surprise me if mortgage spreads widen a little bit more from here because the market isn’t used to absorbing this,” said John Bredemus, head of capital markets at Allianz Investment Management, which oversees over $700 billion worldwide. Bredemus said the spread may return to pre-crisis levels.
“I’d imagine the impact on the mortgage market, being smaller and less liquid, is going to be more significant,” said Donald Ellenberger head of multi-sector strategies at Federated Investors, which manages approximately $360 billion in assets. “Mortgage bonds do look rich, because you do have a price- and yield-insensitive buyer that just buys and buys. Our multi-sector portfolios and funds have a very significant underweight to government mortgages.”
Meanwhile, Mitsubishi UFJ Kokusai Asset Management, which manages approximately $110 billion, sees widening spreads as an opportunity.
“We might add more mortgage bonds if spreads widen,” said Hideo Shimomura, a chief fund investor with Mitsubishi. “The impact of the spread against Treasuries will be quite tame. The pace of the tapering will be quite slow.”
Aside from yields, the Fed’s planned move may see home mortgage rates increase, the report said, noting that the 3.90% average 30-year home-loan rate has increased from the low recorded about five years ago.
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The projections of increasing yield spread came as the Fed announced plans to begin reducing its balance sheet by cutting investments in mortgage bonds and Treasuries. The Fed began buying mortgage bonds in January 2009 amid a surge in the mortgage spread. Its upcoming reductions are set to end its efforts to pump money into the U.S. home-lending market by buying mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae.
Currently, the Fed holds more than a quarter of all agency mortgage-backed securities, which total $6.86 trillion, and 18% of the publicly traded Treasuries market. It plans to begin the reduction with $6 billion of Treasuries and $4 billion of mortgage securities per month. These figures are planned to slowly increase to $30 billion and $20 billion, respectively, Bloomberg reported.
“It would not surprise me if mortgage spreads widen a little bit more from here because the market isn’t used to absorbing this,” said John Bredemus, head of capital markets at Allianz Investment Management, which oversees over $700 billion worldwide. Bredemus said the spread may return to pre-crisis levels.
“I’d imagine the impact on the mortgage market, being smaller and less liquid, is going to be more significant,” said Donald Ellenberger head of multi-sector strategies at Federated Investors, which manages approximately $360 billion in assets. “Mortgage bonds do look rich, because you do have a price- and yield-insensitive buyer that just buys and buys. Our multi-sector portfolios and funds have a very significant underweight to government mortgages.”
Meanwhile, Mitsubishi UFJ Kokusai Asset Management, which manages approximately $110 billion, sees widening spreads as an opportunity.
“We might add more mortgage bonds if spreads widen,” said Hideo Shimomura, a chief fund investor with Mitsubishi. “The impact of the spread against Treasuries will be quite tame. The pace of the tapering will be quite slow.”
Aside from yields, the Fed’s planned move may see home mortgage rates increase, the report said, noting that the 3.90% average 30-year home-loan rate has increased from the low recorded about five years ago.
Related stories:
What’s keeping interest rates low?
Mortgage rates drop for 4th consecutive week
