Interest Rate Roundup

Monday, October 27, 2008

Fannie, Freddie debt costs up; Mortgage rates rising

There's some interesting action in the agency part of the bond market today. Specifically, the spreads, or differences, in yields on Fannie Mae and Freddie Mac corporate debt over Treasuries are widening yet again today. Take, for instance, the spread between Fannie Mae's 10 year debt and 10-year U.S. Treasuries. It's up about 13 basis points to 128 bps right now -- a new cycle high (and well above the Bear Stearns-related peak of 104 bps in March).

Yields on agency Mortgage Backed Securities are also rising sharply, recently up about 18 bps. The spread between MBS yields and 10-year T-note yields is nearing the panic highs seen in March (about 216 bps in spread now vs. a peak of 238 bps on March 6, 2008). That will translate into higher mortgage costs for borrowers seeking conventional, conforming home loans.

More from Bloomberg:

"Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds rose to the highest in two months relative to government notes, boosting home-loan rates.

"The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries climbed about 4 basis points to 207 basis points as of 11:35 a.m. in New York, compared with about 162 basis points on Oct. 20, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

"Agency mortgage-bond spreads have expanded since plunging a week ago by the most since their record drops on Sept. 8 after the U.S. seized Fannie and Freddie. Over the past two months, spreads have narrowed when investors heed a government pledge to support the market to lower home-loan rates, then widened when concern mounts that demand will fall from buyers such as banks and hedge funds who rely on borrowed money."

and ...

"The increase in mortgage-bond spreads has come as the debt costs for Fannie and Freddie, the two largest owners of their own securities, rose to records after the companies' regulator sowed confusion over their level of federal support.

"The spread on the companies' $1.7 trillion of corporate borrowing first set records two weeks ago when the U.S. announced plans to insure bank debt, offering competing government-backed investments. The increase has affected prices for the $4.2 trillion in mortgage securities guaranteed by Fannie and Freddie, though the companies' buying may continue amid higher funding costs, according to the JPMorgan analysts.

Incidentally, if you're wondering exactly what these "current coupon" indices are, here's some more detail from the Bloomberg story ...

"Bloomberg current-coupon indexes represent the average of yields for the two groups of mortgage bonds with prices just above and below face value, the ones lenders typically package new loans into. The spread helps determine the rates offered to homeowners on new prime mortgages of $417,000 or less in most areas, and up to $729,500 in high-cost counties."


  • What do you think this means for mortgage rates over the next couple weeks? I did notice a spike in rates today, to my dismay. Do you think the markets are overreacting and that yields and therefore mortgage rates for conforming 30 year fixed will come back down to the low 6s soon?

    By Blogger Jon, at October 27, 2008 at 9:52 PM  

  • sadly this does not surprise me. the fannie and freddie fallout will continue to haunt the American economy for some time!

    Jesse W.

    By Anonymous Anonymous, at October 28, 2008 at 12:46 PM  

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