A touch of yield? Like in 2006-2007??
(Bloomberg) — Investors on the hunt for both safety and a touch of yield have made a product stuffed with mortgage-backed securities the third-most popular exchange-traded fund this year.
The $15 billion iShares MBS ETF, or MBB, has taken in more than $3 billion this year, according to data compiled by Bloomberg. Buyers have added about $1.5 billion in February alone, putting it on track to be the largest month of inflows since the fund started in 2007.
Agency mortgages are a sweet spot for investors willing to take on just a little bit more risk than offered by Treasuries, getting more yield than the government debt without the credit risk that goes alongside corporate bonds. Securities backed by home loans have also benefited from the Federal Reserve’s decision to hold off on interest-rate increases, as higher borrowing costs discourage refinancing and increase the duration of these securities.
“Even though something like HYG may seem more attractive for yield hunters, mortgages are a way to get a nice coupon while still being cautious,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital, referring to the iShares iBoxx High Yield Corporate Bond ETF by its stock ticker. “It’s about finding yield with safety.”
Like Bill Gross’ Janus-Henderson bond fund, the iShares Mortgage ETF has performed relatively poorly.
Partly, investors are running for cover. But some like the iShares Mortgage ETF dividend yield of 9.15%. Especially with the 10-year Treasury Note yielding only 2.66%.
Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.
Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.
Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.
But the mortgage market has fundamentally changed since 2005-7. First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.
So when the narrator at the end of the movie “The Big Short” said that nothing has changed, that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished. Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.
Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo. My how times have changed.
But are lender credit standards too high? Or are lenders and investors low riding credit?
How about a spoonful of extra credit box expansion?
But let’s not turn back the credit clock too far!!
The Beach Boys sang it best: Shutdown!
The Dow Jones Industrial Average has risen 12.8% since The Federal government’s partial shutdown starting just before Christmas 2018. But since December 26th (the day after Christmas), the Dow has shot up 12.8%. And the S&P500 volatility index, the VIX, has declined by 50%.
Its fun, fun, fun for investors. But for nonessential Federal employees, Don’t Worry, Baby because you will receive back pay as soon as the shutdown is over.
Meanwhile, “Help Us Nancy and Chuck” and end the shutdown.