Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates approached a 14-month high as May employment data failed to allay concern that the Federal Reserve will pare back its unprecedented stimulus.
Fannie Mae’s current-coupon 30-year securities rose 0.06 percentage point to 2.99% as of 3 p.m. Friday in New York, according to data compiled by Bloomberg. Yields reached 3% on June 4, the highest level since April 2012, climbing from a record-low 1.68% in September when the Fed said it would start buying $40 billion of home-loan debt a month to begin its third round of bond purchases.
The Fed has stoked credit markets through buying $85 billion of the bonds and Treasuries monthly to stimulate the economy, a program that policy makers have said would remain in place until evidence emerges of a sustained improvement. While figures released Friday showed the jobless rate unexpectedly climbed from a four-year low to 7.6%, payrolls rose 175,000, more than the median forecast in a Bloomberg survey.
“I don’t think much can be taken away from today’s numbers in terms of tapering being taken off the table,” Matthew Peterson, a money manager in New York at Bank of Tokyo-Mitsubishi Ltd., said in a telephone interview. “We still have the potential for tapering in September and we still have a couple of long summer months of employment reports before we get to that meeting” of Fed policy makers, he said.
“So volatility will continue at least through the summer,” Peterson said.
Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said earlier in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee that the employment report suggested the Fed won’t taper.
“The report doesn’t say anything about tapering at all,” Gross said. Fed Chairman Ben Bernanke “won’t taper. But I think ultimately in order to get a more normal economy, the Fed has got to move interest rates up to more normal levels,” he said.
Pimco has begun to re-enter the mortgage-bond market after relative yields on the securities widened during the past month, he said.
The central bank’s debt buying had been pushing down mortgage rates, helping property prices rally after a five-year housing slump and boosting homeowner refinancing that’s aided consumers and banks. With interest rates now rising, it’s no longer attractive for borrowers to refinance about $600 billion more of Fannie Mae and Freddie Mac 30-year loans, JPMorgan Chase & Co. analysts wrote in a report.
Securities in the more than $5 trillion market for housing debt backed by government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae lost 1.5% in May, the most since April 2004, according to Bank of America Merrill Lynch index data. The notes declined an additional 0.1 percent this month through Thursday.
Losses among Fannie Mae’s current-coupon securities, or those trading closest to face value and the largest target of the Fed’s buying, have been more extreme, totaling 4.5% since April, according to Bank of America Merrill Lynch index data.
A measure of spreads on the Fannie Mae current coupon debt declined for a second day. A Bloomberg index of yields on the mortgage bonds narrowed about 0.01 percentage point to 1.38 percentage points higher than an average of five- and 10-year Treasury rates. The gap soared almost 0.3 percentage point from the end of April to 1.42 percentage points on June 5.
