Another sign of market panic: even though Fannie Mae and Freddie Mac are now officially wards of the state and the Treasury has assured that they will not fall into a negative equity standing, the general credit market stress and flight to quality means that their mortgage backed bonds are trading at elevated spreads. However, mortgage rates are lower than in July due to the rally in Treasuries.
Yields on Fannie Mae and Freddie Mac mortgage bonds jumped relative to Treasuries for a second day, pushing spreads above their levels before the U.S. took over the companies and vowed to support the market.
The difference between yields on Washington-based Fannie’s current-coupon 30-year fixed-rate securities and 10-year Treasuries rose 12 basis points to about 204 basis points as of 3:05 p.m. in New York, according to data compiled by Bloomberg. The rise in yields on the bonds this week suggests an increase in interest rates on new home loans of about 50 basis points, 0.50 percentage point….
Mortgage-bond spreads also climbed as expectations for interest-rate volatility, as measured by swaption prices, rose yesterday to the highest since 2003, according to a Lehman Brothers Holdings Inc. index. Swaptions give the buyers the option to enter into swap contracts later. A swap offers a fixed yield in return for floating payments linked to short-term bank borrowing costs….
The yield on Fannie’s current-coupon mortgage bonds rose to 5.91 percent from 5.71 percent yesterday, suggesting mortgage rates are increasing. The yield is up from 5.63 percent on Sept. 5 and 5.27 percent on Oct. 6.
The average rate on a typical 30-year fixed-rate mortgage rose to 5.97 percent yesterday, compared with as low as 5.72 percent last month and a six-year high of 6.51 percent in July.