- Mortgage-backed securities have enjoyed a three-month winning streak after outperforming US Treasuries through November, Bloomberg reported Monday.
- The increase is mainly due to lower refinancing rates and lower volatility in mortgage-backed assets. When more borrowers refinance loans with lower interest rates, securities lose their appeal against Treasuries.
- The assets gained new fame in 2008 when subprime mortgage-backed securities fueled the housing market collapse of the year and the recession that followed. Those who bet against assets won millions and even billions when the housing bubble burst.
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Mortgage-backed securities have enjoyed a three-month winning streak after outperforming US Treasuries through November, Bloomberg reported Monday.
This is now the longest consecutive monthly asset outperformance since the end of 2017. The excess return of the Bloomberg Barclays US Mortgage-Backed Securities Index over US Treasuries reached 19 points at the November close, raising cumulative total of 20 points, according to Bloomberg.
The assets gained new notoriety in 2008 after several subprime mortgage-backed securities fueled the housing market collapse that year. The small group of investors who gambled against home-backed assets benefited from the recession, with some of the short sellers highlighted in Michael Lewis’ bestselling book The Big Short.
The latest acceleration was supported by lower volatility and a lagging refinancing rate among homeowners. The index surged significantly in the first half of 2019 before stabilizing below its five-year moving average, according to Bloomberg. Lower volatility signals a decrease in homeowners’ chances of refinancing.
A surge in refinancing activity would reduce asset performance, as securities are currently trading at a premium. When homeowners refinance their mortgage loans at lower rates, paying off the principal prematurely lowers the value of mortgage-backed securities.
Refinancing activity has already declined moderately over the past three months, down 4% since late August according to Bloomberg. A forthcoming November prepayments report is expected to show an 11% drop in the month, Bloomberg added, signaling continued strength as fewer borrowers rush to repay their loans.
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