A measure of relative yields on mortgage securities dropped to the lowest on record after the Federal Reserve said it will expand its purchases, extending a rally that offered hedge funds returns of 15 percent in a week.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about 1 basis points to 92 basis points, or 0.92 percentage point, higher than an average of five- and 10-year Treasury rates as of 3 p.m. in New York. Thatâ€™s the narrowest spread since at least 1984 for the securities that guide U.S. home-loan rates.
â€œA typical fundamental-value framework really isnâ€™t applicable hereâ€ because the Fedâ€™s goals differ from those of normal investors, said Todd Abraham, co-head of the government and mortgage-backed fixed-income group at Federated Investors Inc. â€œIt makes it pretty challenging to determine at what point you need to change your allocations. Itâ€™s almost more of a case of needing to try to anticipate what others are going to do.â€
The Fedâ€™s focus on the mortgage market, after speculation its third round of so-called quantitative easing would also include U.S. government bonds, capped a rise today in the housing debtâ€™s absolute yields. A climb of 9 basis points from a record low to 2.21 percent reflected a jump in benchmark Treasury yields as the central bankâ€™s move yesterday to strengthen the economy created soaring inflation expectations.
The spread, which tumbled 20 basis points yesterday as the central bank announced a plan to expand its holdings with monthly purchases of $40 billion of agency mortgage bonds, has declined from 152 at the start of the year.