Investor demand for mortgage-backed securities will help keep the cost of US home loans down after the Federal Reserve ended its $1.25-trillion purchase programme for the debt, said Pacific Investment Management Co., manager of the world’s biggest bond fund.
Home prices in the US are unlikely to increase “dramatically”, said Scott Simon, head of mortgage-backed securities of Pimco.
“If and when we see mortgages cheapen, we expect to see private institutions stepping in to buy,” said Mr. Simon. “The Fed essentially saved the market for medium- and lower-priced houses by halting home price declines.”
The Federal Reserve helped drive mortgage yield premiums to the lowest on record with its acquisition in the $5.4 trillion market of securities guaranteed by Fannie Mae and Freddie Mac or Ginnie Mae. The central bank started purchasing home-loan bonds in January last year to restrain the financing cost amid the worst housing decline since the 1930s.
“We continue to believe that lower-priced homes bottomed last year,” Simon said. “Higher-priced homes should bottom later this year. If one labels recovery as prices rising dramatically, we do not foresee that anytime soon.”
According to data compiled by Bloomberg, yields on the current-coupon 30-year mortgage bonds of Fannie Mae fell to within 0.66 percentage point of 10-year Treasuries last week. Spreads shrank after widening from a record low 0.59 percentage point on March 29 to 0.69 percentage point April 1, a day after the Federal Reserve completed its $1.25-trillion purchased programme.
The $220-billion Total Return Fund of Pimco has given its investors a three percent gain for this year, surpassing 72 percent of its competitors.