The Week Ahead: Manufacturing and Housing Data to Be Released
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 down by coupon rate and settlement date. In the above chart, we see Fannie Mae’s 3.5% coupon for November delivery.
Fannie Mae TBAs fall 2 ticks
Fannie Mae TBAs, which had ended the prior week at 103 10/32, fell 2 ticks to go out at 103 8/32 for the week ending November 13. The ten-year bond yield, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 6 basis points.
Implications for mortgage REITs
Mortgage REITs and ETFs including Annaly Capital Management (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 MBS. Non-agency REITs such as Two Harbors Investment Corp (TWO) are less likely to trade TBAs. Investors interested in trading in the mortgage REIT sector through an ETF can 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 rise, mortgage REITs see capital gains. These gains raise TBA returns, especially when added to their interest income.
You should be careful, however, because REITs use leverage and volatility in interest rates to work against them.
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