Mortgage-backed securities are on track for their worst September performance in five years despite massive support from the Federal Reserve.

As of Tuesday’s close, the Bloomberg Barclays U.S. MBS index month-to-date excess return versus Treasuries stands at -0.18%. That would be the worst performance for mortgage-backed securities for the month since the -0.20% seen in September 2015 if the level holds through Wednesday. The average monthly excess return during September over the last decade has been 0.09%.

The benchmark is also likely to record its worst performance for the first nine months of a year since 2015 with a loss of -0.56%. Unlike that year — when the Fed wasn’t growing mortgages on its balance sheet — the current underperformance is taking place despite the central bank adding around $40 billion of MBS each month. This highlights the headwinds facing the sector as elevated supply, fast prepayment speeds and the risk of forbearance have proved a potent mix.

Consensus on the Street is that supply will remain elevated at least through year-end, with Nomura Holdings Inc. increasing its forecast to $430 billion net for 2020, which would be the highest total since 2009. Record low mortgage rates have spurred home purchasing, cash-out refinancings and rapid home price appreciation, all of which can push net supply higher. Last month, for example, saw record agency MBS net supply of $74 billion, according to Bank of America Corp., a total well above the take down of the central bank.

Prepayment speeds have moved sideways of late, though at an elevated pace. Aggregate Fannie Mae 30-year speeds have increased to 32.8 CPR in August from 32.5 in June, a less than 1% rise, but that level is still almost twice the 17.4 CPR seen the previous August. Forecasts see the 10-year Treasury yield little changed by year-end, and combined with a Fed back on the zero-bound this should keep many American homeowners with incentive to refinance.

A conditional prepayment rate (CPR) is a loan prepayment rate equivalent to the proportion of a loan pool’s principal that is assumed to be paid off ahead of time in each period.

Forbearance remains a concern for Ginnie Mae mortgage bond investors with 9.2% of the overall universe — over twice that seen in conventionals — currently taking advantage of it. With 70% of those forbearance agreements ending during this month and next, buyouts, which act much like prepayments to mortgage investors, could be a near-term problem in the Ginnie space.

As the latest FOMC statement seems to promise to keep rates at zero and quantitative easing at its current pace, support for the mortgage sector is likely to remain in place. Whether that will be enough to overcome the headwinds and produce excess return for the sector as a whole remains to be seen.

Yet, if one is partial to the investing maxim “don’t fight the Fed,” it’s noteable that the Fannie Mae 30-year 2% and 2.5% coupons, which are the focus of the bank’s purchasing, sport positive year-to-date excess returns of 0.66% and 1.48%, respectively.

Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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