Mortgage Bonds Rally

Fixed Rate Mortgage Backed Securities                            November 26th, 2007

Mortgage rates headed south yesterday to a 2 1/2 year low. News that HSBC, the largest bank in the U.K., was bailing out two of its Structured Investments or SIV’s sent investors to a flight to quality buying bonds. HSBC will be moving $45 billion worth of these SIV’s to its own balance sheet in a move that undermines the $100 billion Super Fund that was in the making with the largest banks of the U.S. HSBC has over $2 Trillion in assets to accommodate a move such as this and is unmatched by the larger U.S. banks.

With mortgage bonds trading at a 2 1/2 year high, those looking to lock in, have to at these levels. Even though there may be more room to move, in the nearer term profits will be taken causing rates to possibly tick up.

The only question is the 10 year treasury bond has moved a lot higher, a lot quicker than mortgage backed securities and at some point the 2% point spread between the two would have to narrow. With the U.S. being in a decreasing interest rate environment, I would take a educated guess that the spread will be narrowed by mortgage backed securities trading higher therefore reducing the yield on long term fixed rate mortgages. An excellent mortgage product to take advantage of the longer term view of reduced rates would be the HOA.

(Images Courtesy of Mortgage Market Guide)

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