U.S. markets closed

Mortgages See Swift Turnaround on Fed Buying, Falling Volatility

Christopher Maloney
1 / 3

Mortgages See Swift Turnaround on Fed Buying, Falling Volatility

(Bloomberg) -- Mortgage performance for the year had been lagging Treasuries by 2.87% as recently as last week, but historic levels of support from the Federal Reserve and a precipitous drop in volatility have sent agency MBS prices surging higher and significantly narrowed the gap.

The Bloomberg Barclays U.S. MBS Index year-to-date excess return versus Treasuries closed Wednesday at negative 0.56%, a turnaround of 2.31% since last Wednesday. The past four trading days have seen the sector exhibit its best aggregate performance since at least 2000.

The Fed has been a primary driver of this, as its initial intent to purchase about $200 billion agency MBS morphed into a promise to purchase them in unlimited amounts. Through Wednesday’s close, the bank has bought $174 billion worth, according to New York Fed data.

In addition, a steep drop in volatility has buoyed mortgage investments as it decreases the chance homeowners may find it makes sense to refinance their home loans. And with most mortgage-backed securities trading at a premium, an earlier-than-expected return of principal at par wouldn’t be welcome.

With the Fed targeting an additional $50 billion of agency MBS purchases both today and Friday, this month may yet see a positive excess return. As of yesterday’s close, excess return for March stood at 0.06%. Should it hold through next Tuesday, this would continue its trend of outperformance seen since 2009, as March is the second-best month of the year for average excess return at +0.11%, according to data compiled by Bloomberg News.

Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.