Speculators are betting that since the housing market remains weak so too will mortgage refinancings. (Lending standards are a lot tougher and so are the supply of mortgage brokers). Combine that with a limited supply of bonds and you have a recipe for bonds trading well above par.
Even PIMCO, the fixed income giant that spearheaded the initial MBS purchase drive in late 2008/early 2009 was stunned by the rally in prices.
The average price of $5.2 trillion of bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar yesterday, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt.
“It’s gotten insane,” said Scott Simon, the head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. “This is rarefied air.”
So, what could cause the rally to end? If the government were to figure out a way to force lenders to re-finance (profitably).
Here is some historical perspective: