UPDATE 1-Fund sales keep US mortgage bond market on edge
Adds MFA announcement in paragraphs 24, 25, 26
The US mortgage bond market remained wobbly Tuesday as asset sales by bond funds to meet investor withdrawals showed few signs of abating despite efforts by the Federal Reserve to backstop the asset class.
Spreads on securities backed by single-family homes and commercial properties have widened to levels last seen during the global financial crisis more than 11 years ago.
"The structured finance market is getting hit by forced deleveraging by hedge funds, REITs and other levered funds," said Brown Advisory's head of fixed income Tom Graff.
Among funds who are unloading assets is the AlphaCentric Income Opportunities fund, which put up this weekend about US$1bn for sale to meet redemptions, market participants said.
The fund lost more than 30% of its value last week owing to its heavy exposure to subprime mortgages, the Financial Times said on Sunday.
"The recent NAV (net asset value) decline in our Fund is largely technically driven," the company said in a letter to shareholders on March 20.
"On the flip side, the large draw down in the corporate world, in both equities and bonds, can mostly be explained through deteriorating fundamentals," it added.
The company could not immediately be reached for comments.
HEAVY OUTFLOWS
A spike in redemptions hit mortgage funds last week, as the coronavirus crisis stoked fears that the sharp slowdown in business activities have tipped into a recession.
In a bid to restore investor confidence, the Fed stepped up its buying of mortgage bonds and launched a number of purchase and lending programs to backstop near every part of the bond market.
Still investors pulled a record US$2.6bn from funds that focus on government-backed mortgage securities in the week ended March 18, according to Lipper.
The stampede from credit funds has been widespread.
Investment-grade corporate bond funds saw a record US$35.6bn in withdrawals last week.
In the case of the AlphaCentric Income Opportunities fund, its effort to raise cash has been costly as it sold some of the bonds at distressed levels.
At the end of 2019, 95% of its bond holdings were in risky mortgage paper that included those issued before the financial crisis, and securities from Fannie Mae and Freddie Mac that move default risks off their books, according to the fund's website.
One of the Freddie credit-risk transfer bond it sold fetched 60 cents on the dollar last Sunday, compared with 80 cents assessed two days earlier and par a few weeks earlier, a source familiar with the transaction said.
"It's total carnage," the source said.
MORTGAGE REITS
Anxiety over the ruction in the mortgage market is spreading has grown.
Two mortgage REITs - Invesco Mortgage Capital and MFA Financial - said on Tuesday they could not fund margin calls. Invesco will also delay dividend payments.
MFA said its total obligations under its various financing arrangements as of March 20 was about US$9.5bn.
Another mortgage REIT AG Mortgage Investment Trust said on Monday it was in a similar predicament with margin calls.
Agency mortgage REITs are under pressure from redemptions and margin calls since they are reliant on short-term loans to fund their positions.
KBW analysts said these REITs' values have been hard hit due to recent spread volatility.
"Such wide MBS spreads also indicate to them that dealers remain pressed for liquidity and flexibility to bid for the asset as either a principal or an agent," they said.
SILVER LINING?
The Fed's pledge to buy unlimited amount of agency MBS daily is helping to stabilize the agency MBS market, narrowing their spreads on Tuesday.
Since March 16, its has bought close to US$100bn in agency MBS.
MBS spreads hit 180bp earlier this month before subsiding to 154bp which are still wide as the Fed's MBS purchase has accelerated.
KBW analysts said the Fed would like to return MBS spreads near 100bp which was the level seen prior to the virus-induced turbulence.
"While it may appear as though the Fed's support for the MBS market may not be working, we expect that without the Fed's support at all, mortgage spreads would likely be much wider than they currently are," they wrote in a research note.
GRAPHIC: US weekly mortgage fund flowshttps://reut.rs/2xq0JVq