Ginnie Mae TBAs Continue to Outperform Fannie Mae TBAs
Investors Await FOMC Minutes and Market Reaction to Jobs Report (Part 6 of 6)
Ginnie Mae and the to-be-announced market
The Fannie Mae to-be-announced (or TBA) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go, such as the Federal Housing Administration (or FHA) and Veterans Affairs (or VA) loans.
The biggest difference between a Fannie Mae mortgage-backed security (or MBS) and a Ginnie Mae MBS is that Ginnies have an explicit guarantee from the federal government. Fannies don’t have a guarantee, just a “wink-wink, nudge-nudge” guarantee. As a result, Ginnie Mae MBS trade at a premium compared to Fannie Mae TBAs.
Ginnie Mae TBAs outperform Fannie Mae TBAs
The ten-year bond yield decreased by 13 basis points, with yields decreasing from 1.96% to 1.83%. Ginnie Mae TBAs picked up 15 ticks, while Fannie Mae TBAs increased only seven ticks.
Investors have been switching out of Ginnie Mae TBAs and into Fannie Mae TBAs. Mortgage REITs are big users of TBAs in that they can increase or decrease exposure very quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs. As a result, big moves by REITs will affect the TBA market. Perhaps the adjustment was overdone, making Ginnie Mae TBAs cheaper than Fannies.
Implications for mortgage REITs
Mortgage real estate investment trusts (or REITs), such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs. In the fourth quarter, American Capital Agency moved down aggressively in coupon in its TBA portfolio. This move accounts for some of the underperformance of the higher coupon TBAs. Prepayment speeds are driving these trades.
Investors interested in trading in the mortgage REIT sector via an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors who are interested in making directional bets on interest rates should look at the iShares 20-year bond fund (TLT).
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