(Bloomberg) -- Risk premiums on new agency mortgage bonds tightened Wednesday, as a market some considered unusually cheap before the election was poised to benefit along with the likes of US equities and the dollar.
Fannie Mae current coupon MBS yields relative to Treasuries narrowed to 1.45 percentage point from Tuesday’s close of 1.47 percentage point, according to data compiled by Bloomberg. Treasury yields soared Wednesday as investors piled back into inflation bets, and higher long-term yields generally mean increased mortgage rates and less risk of refinancings.
“I think there are a lot of positive tailwinds for MBS here,” said Neil Aggarwal, portfolio manager at Reams Asset Management. “Risk is bid, volatility is declining and higher rates and a steeper curve are positives for higher-coupon mortgages.” An index of interest rate volatility hit its latest 2024 high on Monday before dropping Tuesday.
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Bond yields climbed throughout October as US economic data remained solid and investors pared positioning on how quickly and by how much the Federal Reserve will cut interest rates this cycle. Its next policy statement comes Thursday, and a quarter-point rate reduction is widely expected.
The Mortgage Bankers Association on Wednesday reported that contracted 30-year US mortgage rates hit their highest level since July last week. The increase over the latest five weeks is the most in two years.
The bond selloff pushed prices on agency MBS to some of the cheapest levels in months, and traders who had steered clear of the sector may see an improved environment.
Ahead of the election results, Citigroup on Tuesday turned overweight on MBS, saying it saw limited downside risk in a Republican sweep. That as fund managers at both Janus Henderson and Columbia Threadneedle recently said they were looking to add the securities.
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