Investors have been ditching bonds in the last six weeks in the belief that a reduction in financial stimulus by the Federal Reserve will continue to push up interest rates.
As a result, the 62 open-end, close-end and exchange-traded funds invested in US mortgage-backed securities, tracked by Lipper, have posted an average loss of 1.87% for the second quarter of 2013 – the sharpest drop since the first quarter of 1994.
The flight from bonds was spurred by Federal Reserve chairman Ben Bernanke when he said, in late May, that the Fed might reduce its $85bn bond purchase scheme (known as Quantitative Easing) later this year.
The market sell-off propelled U.S. benchmark yields and mortgage rates to near two-year highs last week.
Meanwhile, US bond yields contracted by three basis points to 2.51% yesterday after pending home sales in the States rose in May to the highest level seen since late 2006, implying a possible spark as mortgage interest rates began to rise, according to the National Association of Realtors.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased by 6.7%.
Lawrence Yun, chief economist at the National Association of Realtors, said there might be a fence-jumping effect.
“Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher,” he said.
“This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand.”