Are mortgage-backed bonds a buy? The fate of the government-sponsored agencies that produce them, Fannie Mae and Freddie Mac, rests with the state. However, the US Treasury’s rescue plan, whatever it may be, relies on the GSEs inviting in the authorities. Even then, it may only materialise should either entity fail to refinance its debt or puncture a minimum capital threshold.
Such technicalities partly explain why demand for agency mortgage-backed securities and senior debt has been subdued. Last week, for example, Freddie Mac paid a 113 basis point spread over Treasuries to entice investors for its five-year issue – even though the US government’s guarantee on such bonds is becoming ever more explicit.
Other factors help explain why spreads blew out. Capital-constrained, the GSEs can no longer support the MBS market by buying up their own securities. Foreign central banks may prefer not to immerse themselves any deeper in the US’s financial mire. Financial buyers, starved of leverage, are preoccupied with plugging holes in their war-torn balance sheets. Long-only money managers have taken up some of the slack, but they are demanding outsized yields on blue-chip corporate debt too.
Even so, MBS spreads have begun to tighten on anticipated government action. With more than $200bn of GSE debt to be refinanced in the coming weeks, there are ample possible crisis points that may prompt intervention. Spreads would probably narrow further should the Treasury step in and, perhaps, increase liquidity by buying mortgage paper itself or eliminate the credit risk attached to the GSEs as part of a capital injection. Those buying in now, such as bond investor Pimco, should expect a bumpy ride, but ultimately also a profitable one.
Post and read comments on this Lex
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
If you have questions or comments, please email help@ft.com or call:
US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe & Rest of the world: +44 (0)20 7775 6248