- Mortgage-backed securities hit a three-month winning streak after outperforming US Treasuries through November, Bloomberg reported Monday.
- The surge was primarily driven by lower refinance rates and a drop in volatility for mortgage-backed assets. When more borrowers refinance loans with lower interest rates, the securities lose their appeal against Treasury bonds.
- The assets gained new fame in 2008 when subprime mortgage-backed securities powered the year’s housing market meltdown and subsequent recession. Those who bet against the assets won millions and even billions when the housing bubble popped.
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Mortgage-backed securities hit a three-month winning streak after outperforming US Treasuries through November, Bloomberg reported Monday.
The surge is now the longest consecutive monthly outperformance for the assets since the end of 2017. The Bloomberg Barclays US Mortgage-Backed Securities index’s excess return against US Treasuries reached 19 points by November’s close, bringing the year-to-date total 20 points, according to Bloomberg.
The assets gained new notoriety in 2008 after several subprime mortgage-backed securities fueled that year’s housing market meltdown. The small group of investors who bet against the housing-backed assets profited from the downturn, with some of the short-sellers highlighted in Michael Lewis’ bestselling book “The Big Short.”
The latest run-up has been supported by a drop in volatility and a lagging refinance rate among homeowners. The index saw a massive leap higher through the first half of 2019 before stabilizing below its five-year moving average, according to Bloomberg. The lower volatility signals a shrinking chance of refinancing among homeowners.
A jump in refinancing activity would cut into the asset’s performance, as the securities currently trade at a premium. When homeowners refinance their home loans at lower rates, the premature return of principal pushes the value of mortgage-backed securities lower.
Refinance activity has already fallen moderately over the last three months, 4% lower since the end of August according to Bloomberg. An upcoming November prepayment report is poised to show an 11% decline through the month, Bloomberg added, signaling continued strength as fewer borrowers rush to pay off their loans.
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