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BLOOMBERG: Japanese investors venturing into the U.S. home-loan market

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Neediest Homebuyers in U.S. Lifted by Japan: Mortgages
By Jody Shenn - Apr 15, 2013 12:37 PM ET


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Japanese investors venturing into the U.S. home-loan market typically favor debt from Ginnie Mae, which helps finance borrowers with down payments as low as 3.5 percent, because it carries an explicit government guarantee, unlike Fannie Mae and Freddie Mac notes.

U.S. homebuyers are getting an unexpected boost from the Bank of Japan.
Pimco's Gross on Investment Climate, Bank of Japan
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April 4 (Bloomberg) -- Bill Gross, co-chief investment officer at Pacific Investment Management Co., talks about global conditions that helped lead to his success as a professional investor, recent macro-economic developments and the potential impact of the Bank of Japan’s record bond-buying program on markets. Gross speaks with Adam Johnson and Sara Eisen on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
Enlarge image Fed Chairman Ben S. Bernanke

Federal Reserve Chairman Ben S. Bernanke has made buying home-loan securities a central part of his unprecedented stimulus measures to help the economy, revive housing and boost refinancing for existing homeowners. Photographer: Andrew Harrer/Bloomberg
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As 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 from Ginnie Mae, which helps finance borrowers with down payments as low as 3.5 percent, because it carries an explicit government guarantee, unlike Fannie Mae and Freddie Mac notes. Bond buyers from the Asian nation that has suffered three recessions in five years may increase their Ginnie Mae holdings by $50 billion annually as a result of the BoJ’s easing, Nomura Securities International estimates.

“It’s amazing to see the spillover effects of different central bank actions,” said Greg Reiter, the Charlotte, North Carolina-based head of residential mortgage research at the securities arm of Wells Fargo & Co., the largest U.S. home lender. “It could be quite stimulative to the U.S. economy by keeping mortgage rates low and assisting the Fed.”

Potential demand for Ginnie Mae securities from Japanese investors such as banks and insurers comes at an opportune time. The rebounding U.S. housing market has entered its most-active season and Federal Reserve officials signal they’re considering scaling back their own debt buying, which adds $40 billion of U.S. mortgage bonds a month to the Fed’s holdings.
Bernanke’s Stimulus

Fed Chairman Ben S. Bernanke has made buying home-loan securities a central part of his unprecedented stimulus measures to help the economy, revive housing and boost refinancing for existing homeowners.

Yields on Ginnie Mae bonds are important for U.S. real estate because they package mortgages insured by the Federal Housing Administration, often used by first-time homebuyers and borrowers with relatively poor credit.

FHA loans represent about 20 percent of those used in home purchases, according to President Barack Obama’s budget last week, which touted the role of the agency in making credit more available after the private market pulled back after 2007. Rates on FHA 30-year loans are 3.31 percent, down from 3.49 percent on April 2, according to Bankrate.com data.
Home Prices

Property prices in 20 U.S. metropolitan areas gained almost 9 percent from March through January after falling 35 percent from a 2006 peak, an S&P/Case-Shiller 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 February was the second-highest since 2010.

The most common type of Ginnie Mae 3.5 percent securities climbed to a three-month high of 108.6 cents on the dollar as of 12:05 p.m. in New York, from 107.3 cents before the BoJ announcement, according to data compiled by Bloomberg. The yields fell to 1.49 percent, compared with 0.64 percent for 10- year Japanese government bonds.

The Japanese action, which also helped by boosting benchmark Treasury prices, isn’t the only reason for the 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, the most recent round of which started in September.
Spread Widens

Still, data on how much more investors are willing to pay for the Ginnie Mae securities relative to similar Fannie Mae debt demonstrates the importance of the BoJ’s announcement on April 4 that it will buy 7.5 trillion 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 cent 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 led by Satish Mansukhani and Christopher Flanagan to end their recommendation that investors bet on an increasing gap in an April 12 report, in which they wrote that Japan’s buying has “been light so far.” JPMorgan Chase & Co. analysts said in a report that day that U.S. hedge funds and money managers seeking to buy before the demand from the nation materialized would make “the market impact more immediate.”
Investors Anticipate

Beyond mortgage securities, investors are anticipating that the Japanese central bank will influence markets from leveraged buyouts and government bonds in the U.S. to Australian and European investments after the central bank pledged to double the monetary base by the end of 2014.

In interviews with Bloomberg Television, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., predicted the money will “move out of Japan into Treasuries, into other high-quality markets.” Peter Gorra, a BNP Paribas SA dealer, saw funds flowing to Europe and Sebastien Galy, a foreign-exchange strategist at Societe Generale SA, expected the BoJ move to boost Australian assets.

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. JPMorgan analysts said Japanese banks may expand their investments in U.S. asset-backed securities such as bonds tied to student loans and credit cards.
Preferred Habitat

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, a money manager at Fidelity Investments, which oversees $1.6 trillion, said in a telephone interview from Merrimack, New Hampshire.

Ginnie Mae securities are the “preferred habitat” of Japanese investors in the more than $5 trillion market for U.S.- backed mortgage bonds because the government hasn’t taken the step of fully guaranteeing Fannie Mae (FNMA) and Freddie Mac debt since seizing the companies in 2008, he said. Instead, the U.S. has offered the firms aid and pledged to support them.

Net purchases by Japanese investors of Ginnie Mae securities may increase by between $45 billion and $53 billion a year, an amount that would come on top of the $16 billion average rise in their holdings over the past five years, New York-based Nomura analysts led by Ohmsatya Ravi wrote in an April 10 report.
Repatriated Money

Ginnie Mae debt’s slump relative to Fannie Mae securities earlier this year was tied partly to a weakening in the yen, which depreciated 15.2 percent 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 the bonds to invest in riskier assets in their own market that would benefit from the stimulation provided by the weaker currency, according to Fidelity’s Irving. 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 a greater scarcity of available Fannie Mae and Freddie Mac securities, then started playing a greater role in the Ginnie Mae market.

The share of that debt in its mortgage-bond buying rose to as high as 29.3 percent in the week ended Feb. 3, from 16.6 percent in the period ended Jan. 3, according to Credit Suisse Group AG calculations. It fell to 20.2 percent in the last week of March.
Greater Demand

Fannie Mae and Freddie Mac securities may also benefit from the BoJ’s actions if the Fed responds to a relative appreciation in Ginnie Mae debt by purchasing even more of their bonds, Credit Suisse analysts led by Mahesh Swaminathan wrote in an April 11 report.

Greater Japanese demand for Ginnie Mae bonds remains “highly uncertain,” the analysts wrote, especially any shift by the nation’s households, rather than institutional investors, into foreign fixed-income funds, which at “the very least should take a fairly long time to pan out.”

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 Chris Ames, a senior portfolio manager in New York for mortgage- and asset- backed securities at Schroders Investment Management North America Inc.

“It’s not healthy but certainly we have to take it into account in how we make our trading decisions,” Ames said. “These days you spend a lot of time thinking about unintended consequences and how other people will interrupt comments, announcements and data” in ways they wouldn’t have in the past.

To contact the reporter on this story: Jody Shenn in New York at [e-mail]

To contact the editors responsible for this story: Alan Goldstein at [e-mail]; Rob Urban at [e-mail].

http://www.bloomberg.com/news/2013-04-14/neediest-homebuyers-in-u-s-lifted-by-japan-mortgages.html?cmpid=yhoo