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Fannie Mae Securities Are Outperforming Treasuries

Brent Nyitray, CFA, MBA

All Eyes on the Fed: The FOMC Meeting and Real Estate Releases

(Continued from Prior Part)

Fannie Mae and the to-be-announced market

When the Federal Reserve talks about buying MBS (mortgage-backed securities), it’s referring to the TBA (to-be-announced) market. The TBA market allows loan originators to take individual loans and turn them into a homogeneous product they can trade. TBAs settle once a month.

Fannie Mae loans go into Fannie Mae securities. TBAs are broken out by coupon rate and settlement date. In the above chart, we see Fannie Mae’s 3.5% coupon for June delivery.

TBAs rally further than Treasuries

Fannie Mae TBAs started the week at 102 29/32 and picked up 9.5 ticks to go out at 103 6/32. The ten-year bond yield, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT), decreased by 2 basis points.

Implications for mortgage REITs 

Mortgage REITs and ETFs—including Annaly Capital (NLY), American Capital Agency (AGNC), and MFA Financial (MFA)—are the biggest non-central-bank holders of TBAs. They use the TBA market as a vehicle to quickly increase and decrease exposure to MBS. TBAs are highly liquid and much easier to trade than a portfolio of older existing MBS. Non-agency REITs such as Two Harbors (TWO) are less likely to trade TBAs. Investors interested in trading the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Capped ETF (REM).

In general, you can consider mortgage REITs among the biggest lenders in the mortgage market. When TBAs rally, mortgage REITs see capital gains. These gains increase TBA returns, especially when added to their interest income.

You should take care, however, because REITs use leverage and volatility in interest rates to work against them. American Capital Agency reported recently. Its book value per share only increased by a small amount despite a huge rally in bonds in the fourth quarter. Similarly, we saw Annaly Capital Management make few adjustments to its investment portfolio.

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