The RISK...yes there is a reason these agency morts are yielding 4-5 times CDs. This little, not so obvious, failure to value assets at current market, will at times influence the unknowing to think there is a free lunch. Not so, the risk is very high to support a huge payout to greedy little pigs like me, I am a gambler who thinks i can get a yeild like 15% without getting to face the penalty. So may the gods bless us all, because what we need most is good luck that the eruption comes after we are out of rehab..There are no financial planners recommending these agencies because of the huge RISK not covered by the gov.........LOL
I am so sorry to explain this, but you are really way, way off base. For the avoidance of doubt, agency MBS remains AAA rated by S&P and are one of the safest assets to purchase. The value remains solid and has been throughout this crisis.
MBS yields are similiar to 10 year treasury rates, and always have been compared to the 10 year treasury rate. Why? Well, the prepayments history leaves you with a secured bond with a 10 year life.
Why does the rate resemble 10 year tresuries? Because of two factors: 1) the government guarantee to buy back delinquent loans; 2) the secured nature of the mortgage.
What was the historical rate differential between spreads of MBS and 10 year treasury? About 160 bps, but now it is much less than that because of the government ownership of the agencies, and because the biggest buyer of MBS is the US treasury. I think the treasury owns $5T.
Why, when the treasury doesn't have an obligation to buy MBS, would it do so? Well, that is because of two reasons: 1) operation twist where they wanted the front end of the yield curve to fall; and (2) they wanted rates for MBS to stay low.
Who is buying MBS now? Primairliy, the US treasury, but when the US was downgraded by S&P, a bunch of corporate tresury departments bought too.
Does it make any sense to compare either the rate on a mortage loans or MBS to CDs? No, they have nothing to do with each other.
What is the MBS yield today? About 3.00%.
Will agency MREITs suffer a decline in book value as a result of long term impairment on MBS held for investment or for MBS held for sale? No
You need to understand what you fear. You fear the wrong thing. What you need to fear is the lower spreads that result from the higher value of MBS. That is worrisome.
What you have done, which is easy enough to do, is mistaken CIM's RMBS problems for AGENCY MBS. They are different beasts, but if you really feel there is a major conspiraracy here, best to buy a bunch of puts. You might just do okay, but not for the reason you think.
I have made big money on agencies, so not in disagreement.
What happens if the spread goes negative from rates going to say 10% as in the 70s, the gov is out of fiat money to buy, there is no default, but agnc just needs to sell to top the bleeding? That is the risk i am looking at..........GLTA
CD rates have nothing to do with MBS or mortgage rates.
You are comparing issues with non-agency RMBS with agency MBS.
Yes, the US treasury will continue to supports its investment in MBS, because it is fundemantal to its operation twist and because they want MBS rates low to support the housing market.
Is there a historical relationship between 10 year year treasuries and MBS today? Yes, but the spread has lowered from its historical 160bps to a much lower spread, because of the government guarantee on the MBS, because of operation twist and because there is nothing else as safe as MBS guranteed by the US.
Can the government get out of its gurantee? Yes, with much, much pain and much discussions worldwide, since MBS are owned worldwide.
The value is solid, will remain solid, and there will be NO write downs of agency MBS held for sale or for investment.
Why does it make no sense to compare CDs to MBS? Because MBS is structured for its like maturity. MBS is a secured bond with an expected life of 10 years due to prepayment. MBS are AAA rated. Banks who offer CDs are smoetimes AAA rated, but that is a different issue.
Why does AGNC have a higher yield, than MBS? Because AGNC leverges the MBS and gives us a big piece of the spread (difference between MBS coupon and repo costs).
Will there be problems with RMBS? Of course, it is like comparing a mutt to a hybrid german sheppard. Non-agency RMBS can be safe, but there is no one to buy them if they are delinquent.
You are on to something and that is the higher the value of MBS the lower the spread. Is this good for the MREITs? No