Homeowners are rushing to refi mortgages as rates drop

Debt investors are now turning to Treasury bonds for revenue to offset the surge in refinancings
March 27, 2019 12:39PM

Large money managers are buying Treasuries and interest rate swaps in an effort to offset lost income from mortgages. (Credit: iStock)

Homeowners throughout the country are looking to refinance their mortgages thanks to lower borrowing costs, contributing to a sharp government bond rally.

The recent bump in refinancings means investors who own the debt might soon see their loans paid back in full. So now, some large money managers are buying Treasuries and interest rate swaps in an effort to offset lost income from mortgages, the Financial Times reported.

Applications to refinance home loans increased by roughly 12 percent last week compared to the week before, according to data from the Mortgage Bankers Association.

This has worsened the recent government bond rally, analysts and investors told the FT, with 10-year yields dropping about 38 points since the beginning of March.

Real estate investment trusts are especially interested in hedging since their liabilities do not fluctuate with interest rates the same way their mortgage loans do.

The lurch downward in Treasury yields should lessen along with the need to hedge mortgage portfolios, but as the Fed winds down its holdings of mortgage-backed securities, the phenomenon could spike back up. [FT] – Eddie Small