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Ginnie Mae TBAs Rally in the Face of a Bond Market Sell-Off

Brent Nyitray, CFA, MBA

A Quiet Week Ahead for Real Estate Investors

(Continued from Prior Part)

Ginnie Mae and the to-be-announced market

The Fannie Mae TBA (to-be-announced) 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 FHA (Federal Housing Administration) and Veterans Affairs loans.

The biggest difference between a Fannie Mae MBS (mortgage-backed security) 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, a Ginnie Mae MBS trades at a premium compared to a Fannie Mae TBA.

AGNC is a big reason for GNMA TBA performance

The ten-year bond yield increased by 3 basis points, with yields increasing from 2.11% to 2.14%. Ginnie Mae TBAs picked up 5 ticks, a similar move to the Fannie Mae TBAs.

American Capital Agency discussed the changes in mortgage insurance premiums on its earnings conference call. Ordinarily, it doesn’t buy Ginnie Mae TBAs. However, they were sold off significantly on the changes of mortgage insurance premiums, which is one of the reasons Ginnie Mae TBAs have been outperforming Fannie Mae TBAs.

Mortgage REITs are big users of TBAs since they can increase or decrease exposure very quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs.

Implications for mortgage REITs

Mortgage 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 through an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).

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