Larry Light writes in the WSJ that just in the last 4 weeks, there has been significant strengthening in the market for mortgage-backed securities:
Already, these mortgage-backed securities, or MBS, are showing signs that the market thinks the bad times may be ending. At their worst in mid-March, MBS yields were pumped up to 1.89 percentage points more than ultrasafe Treasurys, according to Merrill Lynch research. Lately, that spread has narrowed to 0.97 point. Historically, the gap is only around 0.3.
What this means is that mortgage bonds are still cheap, with many selling below face value — and that investors, now less scared by them, no longer need large yield premiums as an enticement to buy. “We seem to be headed back to the spreads we used to see,” says Tanya Beder, who heads New York financial advisory firm SBCC Group.
A strong market for the bonds will enable Fannie Mae and Freddie Mac to back more mortgages at better terms.