Mortgage bond spreads tighten to lowest level in two years

Hesitant investors to blame

Yield spreads on mortgage-backed securities built on mortgages backed by Fannie Mae and Freddie Mac have tightened to a level not seen since October 2012, according to a Bloomberg report.

From the Bloomberg article:

Yields on benchmark Fannie Mae-guaranteed 30-year bonds narrowed to within 0.92 percentage point of an average of those on five- and 10-year Treasuries as of 1:25 p.m. in New York, down from 0.99 percentage point on Dec. 16, according to data compiled by Bloomberg. That would be the lowest closing level since October 2012.

According to Credit Suisse Group AG strategist Mahesh Swaminathan, the spreads are shrinking because new buyers are hesitant to invest in debt below certain thresholds because overall yields are rising.

“This is a return to the mortgage-friendly environment that existed prior to the previous week or so, when rates declined past prior 2014 lows seen in October," Swaminathan told Bloomberg. “The path of least resistance is probably more tightening.”

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