Mortgage-Bond Yields Fall for Third Day, Pointing to Rate Drop

Yields on Fannie Mae and Freddie Mac mortgage securities fell for a third day from the highest level since the Federal Reserve said it would buy home-loan bonds, suggesting a further decline in home-loan interest rates.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds dropped 0.17 percentage point to 4.75 percent as of 11:35 a.m. in New York, the low since June 3, data compiled by Bloomberg show. While that’s down from a six- month high of 5.07 percent on June 10, it’s still up from 3.94 percent on May 20.

Investors such as mutual funds have been buying in response to a June 10 decision by Barclays Capital to allow mortgage bonds held by the Fed to remain in its benchmark fixed-income indexes, said Art Frank, the head of mortgage-bond research at Deutsche Bank AG in New York. Some investors thought the Fed’s holdings, which may reach as high as $1.25 trillion, might be excluded.

“We’ve got a scramble for 4s and 4.5” percent coupon agency mortgage bonds, which are scarce in the market after being the biggest focus of the Fed’s buying so far, Frank said today in a telephone interview. “Those are all still in the index so managers still need to own them.”

The difference between yields on the Fannie Mae bonds and 10-year Treasuries narrowed 0.12 percentage point today to 1 percentage point, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.7 percentage point on May 22, the lowest since 1992.

Mortgage Rates

Bloomberg current-coupon indexes represent the yields for hypothetical mortgage bonds trading at about face value. The levels are typically based on calculations derived from yields on the two groups trading just above and below par because of the size of their coupons, into which lenders typically package new loans. Those coupons are now 4.5 percent and 5 percent.

The average rate on a typical 30-year loan rose to 5.59 percent in the week ended June 11, up from 4.82 percent four weeks earlier and a record low of 4.78 percent in April, according to McLean, Virginia-based Freddie Mac. The rate fell to 5.67 percent early June 12, from 5.74 percent on June 10, according to Bankrate.com.

Yields on agency mortgage bonds are guiding rates on almost all new U.S. home lending following the collapse of the non- agency market in 2007 and a retreat by banks. The almost $5 trillion market includes securities guaranteed by government- controlled Fannie Mae and Freddie Mac and bonds of U.S.-insured, low-down-payment loans backed by federal agency Ginnie Mae.