Mortgage-Bond Spreads Widen to Three-Month High on Refinancing

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Yields on government-backed mortgage securities that guide U.S. home-loan rates widened to the most relative to Treasuries in almost three months as refinancing soars amid lower borrowing costs.

Yields on benchmark Fannie Mae 30-year bonds climbed to about 1.06 percentage point more than an average of those on five- and 10-year Treasuries as of 10:05 a.m. in New York, up 0.05 percentage point, according to data compiled by Bloomberg. That would be the highest closing level since Oct. 28.

Applications for homeowner refinancings rose last week to the highest since June 2013, as new-loan rates fell to 3.8 percent from 4.57 percent a year earlier, the Mortgage Bankers Association said today. More refinancing boosts issuance of certain securities at the same time as lower yields make the debt less attractive.

“The longer rates remain at current levels,” the more “supply will pick up,” Bank of America Corp. analysts including Satish Mansukhani and Chris Flanagan wrote in a report. “The demand side of the equation also gets murkier as yields retrace lower.”

Issuance this year would be about $200 billion higher with 10-year Treasury yields at 1.75 percent rather than 2.25 percent, according to a Jan. 16 report by the analysts, who have recommended investors avoid the debt since mid-December. Refinancing also can work to the disadvantage of mortgage-bond holders who get repaid faster at par on securities trading for more than face value.

Returns in the $5.5 trillion market for mortgage securities guaranteed by taxpayer-controlled Fannie Mae and Freddie Mac are trailing those on similar-duration Treasuries by 0.95 percentage point this month, according to Bank of America Merrill Lynch index data. That would be worst relative performance since November 2008. Absolute returns average 0.4 percent.

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