A rally in a growing type of Fannie Mae and Freddie Mac securities is vindicating Invesco Mortgage Capital Inc.'s decision to be a big player in the market.
The real estate investment trust owned $615 million of the $12.6 billion of the Fannie Mae and Freddie Mac risk-sharing bonds issued as of Dec. 31, up from $431 million six months earlier. While the REIT was sitting on $15 million of paper losses at the end of last year after it bought more as prices slumped, a reversal this year has left the firm with gains on its purchases as well as "attractive" income from coupon payments, according to Chief Executive Officer Richard King.
"We were one of the early buyers, and willing to accept some liquidity and spread volatility risk, because this sector is one of the best opportunities in the whole mortgage market," King said today on a conference call to discuss fourth-quarter earnings.
The market for the debt has been volatile, with prices and spreads, or yields relative to benchmark rates, swinging as sales expand. A portion of an April offering jumped to more than 108 cents on the dollar the next month, before tumbling to almost 90 cents in November. The notes traded at more than 99 cents Tuesday, according to Trace, the Financial Industry Regulatory Authority's bond-price reporting system.
The government-backed companies began selling the securities in 2013 to reduce taxpayer risks. The Fannie Mae and Freddie Mac offerings are unsecured debt whose principal can be erased when enough of the mortgages packaged into separate bonds guaranteed by the companies default. Issuance this year totals about $2.4 billion, according to data compiled by Bloomberg.
Invesco Mortgage, a $21 billion-asset REIT managed by Atlanta-based Invesco Ltd., is "probably one of the few largest holders" of the securities, which are tied to loans whose quality and performance has been "excellent," King said. Increasing issuance and more buyers will be positives for the market, Chief Investment Officer John Anzalone said.
While investors including Fidelity Investments, TCW Group Inc. and DoubleLine Capital said last month they’ve been declining to buy the bonds, other firms have been saying they like the securities, including REITs American Capital Mortgage Investment Corp. and Two Harbors Investment Corp. this month.
