Mortgage Bond Prices Rise to ‘Insane’ Records: Credit Markets
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By Jody Shenn
June 24 (Bloomberg) -- Mortgage securities with U.S.-backed guarantees are trading at record high prices on speculation homeowner refinancing will fail to accelerate and as supply of the bonds remains limited.
The average price of $5.2 trillion of bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar yesterday, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt.
“It’s gotten insane,†said Scott Simon, the head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. “This is rarefied air.â€
U.S. existing home sales unexpectedly fell last month and purchases of new houses tumbled to a record low, underscoring how borrowers’ ability to qualify for financing is limited even as rates drop. Bond prices show investors aren’t concerned homeowners will pay back the mortgages underlying the securities early, forcing them to reinvest in new debt at lower yields.
Applications for mortgage refinancings are off almost 57 percent from last year’s peak reached in January, according to the Mortgage Bankers Association. The average rate on a typical 30-year home loan fell to 4.75 percent last week, down from 5.3 percent in April, the group said June 22.
Tougher Underwriting
Refinancings are being suppressed because more than 23 percent of homeowners with mortgages owe more than their houses are worth, according to Seattle-based Zillow.com. Borrowers also face tougher underwriting standards at lenders selling debt to Fannie Mae and Freddie Mac, said Tad Rivelle, head of fixed- income investments at Los Angeles-based TCW Group Inc., with $115 billion in assets under management.
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds instead of government debt was unchanged at 194 basis points, or 1.94 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.002 percent.
Interactive Data Corp., the Pearson Plc unit that provides financial market data and services, set initial price guidance for the $1.3 billion term loan the company is seeking to fund its leveraged buyout.
The interest rate on the loan will be 475 basis points more than the London interbank offered rate, with a 1.75 percent Libor floor, according to a person familiar with the offering who declined to be identified because the terms are private. Libor is the rate banks charge each other for loans.
Interactive Data proposes selling the loan at 98 cents on the dollar, said the person, reducing the proceeds for the company and boosting the yield for investors.
One Bryant Park
Bank of America Corp. and JPMorgan Chase & Co. offered potential terms for $650 million of securities tied to a midtown Manhattan office tower.
The top-rated 10-year securities tied to One Bryant Park, a 52-story building opened in 2008 that houses the main office in New York for Charlotte, North Carolina-based Bank of America, may price to yield 155 basis points more than the benchmark swap rate, according to a person familiar with the sale.
The offering marks the third issue of commercial mortgage- backed securities this year, and will bring total sales in 2010 to about $1.67 billion, according to data compiled by Bloomberg.
Credit Risk
An indicator of corporate bond risk in the U.S. rose as Fed officials retained a pledge to keep the benchmark interest rate at a record low for an “extended period†and signaled that Europe’s debt crisis may harm American growth.
The central bank, at a two-day meeting, left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008. High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,†the Fed said, repeating language from every policy meeting since March 2009.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 1.2 basis points to a mid-price of 115.75 basis points as of 5:41 p.m. in New York, according to Markit Group Ltd.
In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 7.5 basis points to 125.5, Markit prices show.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan was little changed at 130 basis points as of 7:52 a.m. in Singapore, according to Royal Bank of Scotland Group Plc.
Emerging Markets
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
In emerging markets, the extra yield investors demand to own bonds relative to government debt rose 5 basis points to 320 basis points, the highest since June 14, according to JPMorgan’s Emerging Market Bond index.
Grupo Bimbo SAB, the world’s largest bread maker, sold $800 million of 10-year dollar bonds in its first international issue. The 4.875 percent notes due in 2020 from the Mexico City- based company priced to yield 4.91 percent, or 180 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.
Fannie Mae
Yields on Washington-based Fannie Mae’s current-coupon mortgage bonds backed by 30-year fixed-rate home loans fell to about 3.85 percent yesterday, the lowest since January 2009, according to data compiled by Bloomberg.
Their yields have fallen to within 72 basis points of 10- year Treasuries from this year’s high of 93 basis points on May 24, after climbing from a record low of 59 reached March 29.
Bond buyers view so-called agency mortgage securities as a refuge, said Andrew Harding, who oversees $22 billion as the chief investment officer for taxable fixed-income at PNC Capital Advisors LLC in Cleveland.
“They’ve become an anchor in portfolios,†Harding said. “It’s not Treasuries. It’s got some yield, but it’s not equity- like risk.â€
The market for agency mortgage bonds has shrunk since it peaked at $5.4 trillion in February, partly because Fannie Mae and Freddie Mac of McLean, Virginia decided earlier this year to purchase about $200 billion of delinquent loans out of their securities to reduce their expenses, according to Bank of America data.
Fed Purchases
Many outstanding securities are also no longer trading after the Fed’s unprecedented purchases, which began in January 2009, and the Treasury’s acquisition of an additional $220 billion of the debt in a separate program begun after the U.S. seized Fannie Mae and Freddie Mac in September 2008.
The weak housing market will likely limit future issuance, said David Land, a mortgage-bond manager at St. Paul, Minnesota- based Advantus Capital Management Inc., which oversees about $18 billion. Outstanding U.S. home-mortgage debt has dropped in eight straight quarters since the third quarter of 2008, falling 3.6 percent to $10.2 billion, Fed data show.
New-home sales tumbled 33 percent last month to a record low annual pace of 300,000, the Commerce Department said in a report. Sales of previously owned homes unexpectedly fell 2.2 percent in May, the National Association of Realtors said.
The median U.S. home sales price slid 29 percent to an almost eight-year low of $164,600 in February from a peak of $230,300 in July 2006, according to the National Association of Realtors in Chicago.
Refinancing hasn’t climbed much partly because there are fewer loan brokers competing to earn fees after being blamed for creating more bad loans than direct lenders, Land said.
“There’s less of a solicitation effort going on,†he said. “If anybody were to figure out a way to refinance people, the mortgage-bond market would be in really bad shape.â€