Mortgage-backed bonds shine as housing market rebounds

Purchases of new homes jumped in January by the most in two decades.
AFP/Getty Images/File 2012
Purchases of new homes jumped in January by the most in two decades.

The US housing rebound is making local debt backed by home-mortgage payments the safest place for municipal investors facing the prospects of tax changes and higher interest rates.

Since the 18-month recession ended in 2009, bonds sold by state housing agencies from Massachusetts to California to finance single-family mortgages have delivered the best returns in the $3.7 trillion municipal market (after adjusting for volatility).

For investors betting that a strengthening economy will push yields higher this year or that Congress will reduce munis’ tax-exemption to shrink the federal deficit, housing-related local debt is proving a haven, according to data compiled by Bank of America Merrill Lynch and Bloomberg.


‘‘The recovery story in the housing market in general is doing a lot to drive’’ returns, said John Hallacy, at Bank of America in New York. ‘‘There’s a sense that we’ve recovered a lot of ground.”

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Led by issuers such as the California Housing Finance Agency and Florida’s Housing Finance Corp., localities have about $66 billion of single-family munis outstanding, Bloomberg data show. The Massachusetts Housing Finance Agency plans to offer $320 million of such debt this month, Bloomberg data show. Such bonds have earned about 21 percent when adjusted for price volatility since July 1, 2009, beating the 13 percent gain for the broader muni market, the data show. Treasuries earned 4.3 percent.

Housing-finance agencies generally sell bonds to fund low-interest mortgages for first-time buyers who earn less than the local median income. They have helped more than 2.6 million families buy homes, according to the National Council of State Housing Agencies.

Purchases of new homes jumped in January by the most in two decades. Home prices in 20 US cities rose 6.8 percent in the 12 months through December, the biggest annual gain since 2006, according to the S&P/Case-Shiller index.

The housing securities will probably extend their performance because their higher relative yields will help shield investors from any increase in interest rates, said Michael Brilley, at Sit Investment Associates in Minneapolis.


Many investors anticipate interest rates will climb this year or in early 2014. Yields on 30-year Treasuries will rise by about 0.4 percentage point to 3.53 percent in the second quarter of 2014, according to the median response of 48 analysts in a Bloomberg survey.

‘‘If interest rates go up, they will not be as hard hit by price depreciation as other bonds,’’ said Brilley, who helps manage $3 billion of munis.

‘‘As interest rates have come down and may now start going sideways to up, we’d rather own bonds like this that are more stable in price,’’ Brilley said. His firm directs 17 percent of its muni portfolio to single-family housing bonds.

Single-family munis tend to yield more than other local debt because investors want compensation for the risk issuers may prepay the bonds as homeowners refinance or sell, said Blake Miller, at Neuberger Berman Group,which oversees $11 billion in local debt, including single-family munis.