Mortgages See Swift Turnaround on Fed Buying, Falling Volatility

(Bloomberg) -- Mortgage performance for the year had been lagging Treasuries by 2.87% as recently as last week, but historic levels of support from the Federal Reserve and a precipitous drop in volatility have sent agency MBS prices surging higher and significantly narrowed the gap.

The Bloomberg Barclays (LON:BARC) U.S. MBS Index year-to-date excess return versus Treasuries closed Wednesday at negative 0.56%, a turnaround of 2.31% since last Wednesday. The past four trading days have seen the sector exhibit its best aggregate performance since at least 2000.

The Fed has been a primary driver of this, as its initial intent to purchase about $200 billion agency MBS morphed into a promise to purchase them in unlimited amounts. Through Wednesday’s close, the bank has bought $174 billion worth, according to New York Fed data.

In addition, a steep drop in volatility has buoyed mortgage investments as it decreases the chance homeowners may find it makes sense to refinance their home loans. And with most mortgage-backed securities trading at a premium, an earlier-than-expected return of principal at par wouldn’t be welcome.

With the Fed targeting an additional $50 billion of agency MBS purchases both today and Friday, this month may yet see a positive excess return. As of yesterday’s close, excess return for March stood at 0.06%. Should it hold through next Tuesday, this would continue its trend of outperformance seen since 2009, as March is the second-best month of the year for average excess return at +0.11%, according to data compiled by Bloomberg News.

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