Global issuance of mortgage-backed securities falls to a 23-year low

By Patturaja Murugaboopathy

(Reuters) - The issuance of global mortgage-backed securities (MBS) slumped to a 23-year low in the first four months of this year, highlighting the turmoil in the real estate sector as higher mortgage rates hit property sales and refinancing. According to Refinitiv data, global MBS issuance stood at $100 billion in the first four months of this year, the lowest since 2000.

The property sector, often a leading indicator for other economic activity, has seen a slump this year due to a spike in mortgage rates as global central banks increased interest rates to tame inflation.

MBS consist of pools of home loans and other real estate debt and typically carry higher yields than U.S. Treasuries.

Analysts said the slower issuance of bonds could point to more trouble for the sector as there would be a smaller supply of funds for borrowers, who are already hit by banks' tighter lending standards after the recent banking turmoil.

"The decline in the issuance of MBS could lead to a reduction in the availability of credit, making it harder for home-owners and property developers to secure financing," said Armstead Jones, strategic real estate advisor at Real Estate Bees. "This could, in turn, lead to a slowdown in the property sector's growth and development. The refinancing of existing mortgages may also be affected, as there may be fewer lenders available to refinance existing loans leading to private lenders and higher rates."

The fall in issuance also comes from less demand from banks as they look to ditch MBS after the failure of Silicon Valley Bank and Signature Bank in March. The two banks held large amounts of MBS, and the slump in bond prices prompted investors to withdraw deposits for fear the banks would be unable to service their liabilities. The data showed the issuance of Agency MBS, issued by government agencies such as Fannie Mae, Ginnie Mae and Freddie Mac, dropped 47% over last year to $42 billion. Issuance by banks dropped to $38.3 billion, a 71% fall. Issuance of MBS shot up since 2020 as central banks slashed interest rates and the Federal Reserve bought them in bulk to bolster credit markets. The Fed holds about a quarter of the total $12 trillion U.S. MBS market.

Brian Quigley, a senior portfolio manager of MBS at Vanguard, said the supply of MBS should increase as the Fed and the US Federal Deposit Insurance Corporation offload holdings, including the massive amount of MBS from SVB and Signature Bank. The spread between the ICE (NYSE:ICE) BoFA US Mortgage Backed Securities Index and the 10-year U.S. Treasury index has widened to 105 basis points, up from 85 bps at the start of the year.

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"We expect more underperformance in MBS. Because of the turmoil in the banking sector, with MBS being a reason, there is going to be less demand from banks for MBS in the market," said Vanguard's Quigley. "That should pressure spreads to widen as well."