Efforts by the Federal Reserve to prop up the mortgage-backed securities (MBS) market do not appear to have worked as well as hoped, according to a new data analysis released by Bloomberg.
As of Sept. 29, the Bloomberg Barclays U.S. MBS index month-to-date excess return versus Treasuries came in at -0.18%, which Bloomberg identified as the worst September performance for MBS since the -0.20% recorded in September 2015. The average monthly excess return during September over the last decade was 0.09%.
Furthermore, Bloomberg warned the benchmark was likely to record its worst performance for the first nine months of a year since 2015 with a loss of -0.56%.
“Unlike that year—when the Fed wasn’t growing mortgages on its balance sheet—the current underperformance is taking place despite the central bank adding around $40 billion of MBS each month,” observed Christopher Maloney, a market strategist and former portfolio manager authored the Bloomberg coverage of the data analysis. “This highlights the headwinds facing the sector as elevated supply, fast prepayment speeds and the risk of forbearance have proved a potent mix.”
Still, there is no reason to suspect the Federal Reserve will shift its course of action. Maloney noted the central bank is committed to keeping rates at historic lows and retaining its quantitative easing policy.
“Whether that will be enough to overcome the headwinds and produce excess return for the sector as a whole remains to be seen,” he added. “Yet, if one is partial to the investing maxim ‘don’t fight the Fed,’ it’s notable that the Fannie Mae 30-year 2% and 2.5% coupons, which are the focus of the bank’s purchasing, sport positive year-to-date excess returns of 0.66% and 1.48%, respectively.”
One factor that can create more angst in the MBS involves forbearance. The Bloomberg analysis highlighted that forbearance occurs more than twice in the Ginnie Mae portfolio than with conventional mortgages.
“With 70% of those forbearance agreements ending during this month and next, buyouts, which act much like prepayments to mortgage investors, could be a near-term problem in the Ginnie space,” Maloney wrote.