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Neediest Homebuyers in U.S. Lifted by Japan: Mortgages

*from www.bloomberg.com, April 15, 2013 (To view original article click here.)

Take Away #1: U.S. homebuyers are getting an unexpected boost from the Bank of Japan.

Key Facts and Figures:

  • Governor Haruhiko Kuroda’s efforts to spark inflation by doubling the central bank’s bond purchases shrinks the available debt in his country.
  • Traders are betting that will bolster demand for U.S. owned Ginnie Mae’s mortgage securities, pushing up prices and lowering yields that guide home loan rates.
  • Japanese investors venturing into the U.S. home-loan market typically favor debt form Ginnie Mae, because it carries an explicit government guarantee.
  • Bond buyers from the Asian nation may increase their Ginnie Mae holdings by %40 billion annually as a result of BoJ’s easing.
  • “It could be quite stimulative to the U.S. economy by keeping mortgage rates low and assisting the Fed,” said Greg Reiter of Wells Fargo & Co.

Take Away #2: Fed Chairman Ben Bernanke has made buying home-loan securities a central part of his unprecedented stimulus measures to help the economy.

Key Facts and Figures:

  • Yields on Ginnie Mae bonds are important for U.S. real estate because they package mortgages insured by the Federal Housing Administration.
  • These mortgages are often used by first-time homebuyers and borrowers, with relatively poor credit.
  • FHA loans represent about 20% of those used in home purchases.
  • Rates on FHA 30-year loans are 3.1%, down from 3.49% on April 2, according to Bankrate.com data.

Take Away #3: Home prices rise as Japanese action boosts benchmark treasury prices.

Key Facts and Figures:

  • Property prices in 20 U.S. metropolitan areas gained almost 9% from March through January after falling 35% from a 2006 peak, an S&P/Schiller index shows.
  • Pending home sales tracked by the National Association of Realtors typically start accelerating in March of each year.
  • On a seasonally adjusted basis, the tally in Feb. was the second highest since 2010.
  • The most common type of Ginnie Mae 3.5% securities climbed to a three-month high of 108.6 cent on the dollar as of 12:05 p.m. in New York.
  • That is up from 107.3 cents before the BoJ announcement, according to data compiled by Bloomberg.
  • The yields fell 1.49%, compared with 0.64% for 10-year Japanese government bonds.
  • The Japanese action isn’t the only reason for gains.
  • Ginnie Mae, Fannie Mae, and Freddie Mac bonds all rose after a disappointing April 5 report on American job growth fueled speculation the Fed will delay the downsizing of its debt buying.

Key Facts and Figures:

Take Away #4: Data on how much more investors are willing to pay for Ginnie Mae securities relative to similar Fannie Mae debt demonstrates the importance of the BoJ’s announcement.

Key Facts and Figures:

  • The BoJ announced on April 4 that it will buy 7.5 trilling yen ($78.6 billion) of bonds a month.
  • The Ginnie-Fannie gap has reached 2.3 cents on the dollar, the highest this year and up from 1.3 cents at the end of March, Bloomberg data show.
  • The difference has seen several rounds of expansion and contraction this year, first falling to a 16-month low of about 1 cent in February.
  • It then rebounded to as high as 1.7 cents in March as the Fed devoted more of its buying to Ginnie Mae debt, before easing again.
  • The recent gains were enough for Bank of America Corp. analysts to end their recommendation that investors bet on an increasing gap in an April 12 report.

Take Away #5: Money will “move out of Japan into Treasuries, into other high-quality markets,” predicts Bill Gross of Pacific Investment Management Co.

Key Facts and Figures:

  • Beyond mortgage securities, the Japanese central banks may influence markets from leveraged buyouts and government bonds in the U.S. to Australian and European investments.
  • The Japanese central bank pledged to double the monetary base by the end of 2014.
  • Morgan Stanley analysts see more of Japan’s money moving into the market for collateralized loan obligations, which package high-risk company loans such as ones used in buyouts.

Take Away #6: For the almost $1.4 trillion market for Ginnie Mae securities, “demand from Japanese investors could triple from what it was in recent years” said William Irving of Fidelity investments.

Key Facts and Figures:

  • Ginnie Mae securities are the “preferred habitat” of Japanese investors because the government hasn’t taken the step of fully guaranteeing Fannie Mae and Freddie Mac debt, said Irving.
  • Net purchases by Japanese investors of Ginnie Mae securities may increase by between $45 billion and $53 billion a year.

Take Away #7: Ginnie Mae’s debt’s slump relative to Fannie Mae securities earlier this year was tied partly to a weakening yen.

Key Facts and Figures:

  • The yen depreciated 15.2% against the dollar in the three months through Feb. 14 as investors reacted to the election of Prime Minister Shinzo Abe and his push for added stimulus.
  • Some Japanese investors repatriated money from the U.S. by selling bonds to invest in riskier assets in their own market that would benefit from stimulation provided by the weaker currency.
  • Some sold to book gains, according to Nomura, and a strong dollar also expanded the share of Ginnie Mae debt in holders’ portfolios and made new purchases look more expensive.
  • The Fed, which was also facing greater scarcity of available Fannie Mae and Freddie Mac securities, then also started playing a greater role in the Ginnie Mae market.
  • The share of debt in its mortgage-bond buying rose to as high as 29.3% in the week ended Feb 3, from 16.6% in the period ended Jan. 3.
  • It fell 20.2% in the last week of March.

Key Facts and Figures:

Take Away #8: Fannie Mae and Freddie Mac securities may also benefit form the BoJ’s actions if the Fed responds to a relative appreciation in Ginnie Mae debt by purchasing even more of their bonds.

Key Facts and Figures:

  • Greater Japanese demand for Ginnie Mae bonds remains “highly uncertain” analysts wrote.
  • Still, the rally in Ginnie Mae debt is another reflection of “this upside-down world in which bad news is good news” because it means more central bank action, said Chis Ames of Schroders Investment Management North America Inc.

*To view original article from www.bloomberg.com click here.

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