The Fed has been on a mortgage bond buying spree since May with a goal of $30 billion in purchases in mind, according to a MarketWatch report. ETF investors can put mortgage bond funds on their radars as the central bank takes on this hefty endeavor and ramps up their purchases through the end of the year.
The purchase of mortgage bonds was something the Fed implemented over 10 years ago during the financial crisis in 2008—of course, mortgage-backed securities at the time were deemed as toxic assets that helped cause the crisis. The goal was to spur demand for the securities by purchasing them at distressed prices offered by secondary mortgage market players Fannie Mae and Freddie Mac.
“The initial focus after the crisis was to put a floor under the depreciation of housing values by increasing demand for those securities,” said Doug Duncan, chief economist at Fannie Mae, in an interview with MarketWatch Friday.
Portfolio managers at bond firm Pacific Investment Management Company (PIMCO) say that if the central bank reinvested in mortgage bonds, it would help the mortgage-backed securities market.
“If the Fed reinvested in the mortgage market, it would go a long way toward alleviating the stress in MBS markets, and reduce rates to homeowners and would-be homeowners alike,” the PIMCO team wrote.
Per the MarketWatch report, the PIMCO team “also underscored that while the Fed has helped tame the funding market for Treasury debt, that financing costs for government-backed bonds recently had shot up to nearly 60 basis points above one-month Libor, or rates only seen in ‘the financial crisis.’”
3 ETFs to Watch:
- iShares MBS ETF (MBB ): seeks to track the investment results of the Bloomberg Barclays U.S. MBS Index. The index measures the performance of investment-grade mortgage-backed pass-through securities (“MBS”) issued or guaranteed by U.S. government agencies.
- SPDR Portfolio Mortgage Backed Bond ETF (SPMB ): seeks to provide investment results that, correspond generally to the price and yield performance of the Bloomberg Barclays U.S. MBS Index. The index is designed to measure the performance of the U.S. agency mortgage pass-through segment of the U.S. investment grade bond market.
- iShares GNMA Bond ETF (GNMA ): seeks to track the investment results of the Bloomberg Barclays U.S. GNMA Bond Index. The underlying index includes fixed-rate mortgage pass-through securities issued by GNMA that have 30- or 15-year maturities. The index measures the performance of mortgage-backed pass-through securities issued by GNMA.
This article originally appeared on ETFTrends.com.
