NEW YORK - After posting their worst returns since 1999, government-backed mortgage bonds are starting 2013 with losses on speculation the end of Federal Reserve purchases is in sight and as homeowner refinancing roils the market.
The slump spans from new low-coupon securities the U.S. central bank is targeting to bonds backed by higher-rate loans more damaged by refinancing, the biggest portion of the $5.3 trillion market. A Bank of America Merrill Lynch index has lost 0.19 percent this month after returning 2.59 percent in 2012.
“The start of the year has been weak across the board,” Mahesh Swaminathan, the head of residential mortgage-bond strategy at Credit Suisse Group AG in New York, said in a telephone interview.
The declines show the risks to investors from the Fed’s effort to hold borrowing costs at record lows by adding $40 billion a month of mortgage debt to its balance sheet, as well as from President Barack Obama’s bid to help more homeowners lower their bills. Prepayments on Fannie Mae, Freddie Mac and Ginnie Mae bonds trading for more than face value damage holders by returning their principal faster at par and curbing interest.
Minutes of a December meeting of Fed policy makers released Jan. 3 showed their debt-buying program may end this year. That’s depressing the values of low-coupon agency mortgage securities that became inflated by the purchases.
High-coupon securities fell on Bank of America Corp.’s plan announced Jan. 7 to sell contracts to service almost $200 billion of loans. Investors speculated the move added to the risks of more refinancing through the federal Home Affordable Refinance Program, or HARP, which helped boost replacement loans by 34 percent to $1.75 trillion in 2012, Mortgage Bankers Association estimates show.
Fannie Mae’s 3.5 percent securities fell last week to 106.1 cents from 106.6 cents on the dollar at year-end, according to data compiled by Bloomberg. The debt finished 2011 at less than 103 cents. The guarantor’s 5.5 percent securities declined to 108.5 cents from 108.6 cents on Dec. 31.
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. climbed for a second day. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, increased 1.4 basis point3 to a mid-price of 88.6 basis point5 as of 11:07 a.m. in New York, according to prices compiled by Bloomberg. The benchmark has climbed from 84.9 on Jan. 7, the least since Sept. 14.
The measure typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, increased 0.12 basis point to 13.56 basis points as of 10:53 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.
Bonds of Transocean Ltd. are the most active dollar- denominated corporate securities today, accounting for 3.5 percent of the volume of dealer trades of $1 million or more as of 11:08 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Billionaire investor Carl Icahn has acquired a 1.56 percent stake in the world’s largest offshore rig operator and is seeking more, according to a statement posted yesterday on Transocean’s website.