Residential mortgage bonds in the US are once again in the spotlight of the financial market.
Many investors are now venturing out for mortgage bonds backed by the federal government as a safe haven from the turmoil of the global economy, a turnaround fortune that helped drive interest rates to record lows.
The average 30-year fixed-rate mortgage hit 4.58 percent this week from last week’s 4.69 percent, according to Freddie Mac. This is the lowest interest rate since the government-sponsored mortgage agency began tracking rates in 1971.
This would be good news for the US economy and the housing market. Declining interest rates often become a shock absorber for a troubled economy, driving waves of mortgage refinances that put more cash into homeowner’s hands by lowering their monthly obligations.
However, fewer homeowners have taken advantage of the low interest rates to refinance their mortgage because some lack the qualifications needed to refinance, while others have already refinanced when interest rates were almost this low last year.
The government’s backing of mortgage debt seemed to offer a risk-free investment at a higher yield compared with the Treasury debt.
"For better or worse, right or wrong, most accounts these days see Fannie and Freddie mortgage-backed securities as quasi-governmental instruments, guaranteed even more than in the past," said Walter Schmidt, a mortgage strategist from FTN Financial.
As a result, prices of mortgage bonds are near record highs set almost 20 years ago, according to the Barclays Capital MBS Index, which tracks the price of mortgage-backed securities.
However, bond yields, which move in an opposite direction of prices, are near record lows, with a 10-year note hitting 2.93 percent on Thursday, the lowest record since April 2009.
Overall, the refinancing activity in the US has been relatively quiet. According to the Mortgage Bankers Association, refinancing applications surged 13 percent last week. But it is still half of the level seen in the previous year.