Investors' Appetite Increases For Agency Mortgage Bonds
10/20 01:55 PM
NEW YORK(Dow Jones)--Investors favored mortgage-backed securities guaranteed by Fannie Mae (FNM:$0.9733,$0.0233,2.45%) and Freddie Mac (FRE:$1.07,00$-0.0800,-6.96%) Monday as the credit environment showed some signs of improvement with a key lending rate plummeting.
Risk premiums, or spreads, tightened by 18 basis points over Treasurys to 164 basis points, according to market participants.
"Investors are starting to be more comfortable with the steps being taken to ease the credit crunch," said Mahesh Swaminathan, mortgage strategist at Credit Suisse (CS:$44.7200,$1.3200,3.04%) .
On Oct. 14, the risk premium was quoted at 198 basis points over 10-year Treasurys, he noted, adding the 10-year Treasury rate is 3.92% currently versus 4.02% on Oct. 14.
"Libor is also down sharply on Monday," he said.
The closely watched London interbank offered rates, at which banks borrow from each to fund regular operations, posted their first significant declines in months on Monday.
Three-month U.S. dollar Libor dropped to 4.05875%, its lowest since Sept. 30, from Friday's fixing of 4.41875%, while the one-month rate fell to 3.75125% from 4.18125%, according to data from the British Bankers' Association.
"There is an increased appetite for mortgage-backed securities assets that are relatively cheap," Swaminathan said, adding he expects this to continue.
Volume was "reasonable" Monday, he said, adding the buying was "relatively broad based."
Domestic money managers and leveraged investors were big buyers, said Art Frank, director of MBS research at Deutsche Bank (DB:$45.9800,$2.4800,5.70%) .
More than the volume of buyers though, he said, there was a scarcity of sellers, skewing the market.
These bonds, which are guaranteed by Fannie Mae (FNM:$0.9733,$0.0233,2.45%) and Freddie Mac (FRE:$1.07,00$-0.0800,-6.96%) , play a critical role in the housing finance market. The yields on these bonds determine the mortgage rates that consumers pay on their home loans.
Separately, Pimco's Total Return Fund, the world's largest bond fund, raised its holdings of mortgage-backed securities to 79% by the end of September, a level not seen since at least June 2000, from 69% a month earlier, according to data from the company's Web site.
In contrast, Pimco continued to snub U.S. government debt, reducing its holdings for the ninth straight month, even though Treasurys have benefited over the past couple of months from massive safe-haven flows.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@ dowjones.com
(Min Zeng contributed to this report)
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10-20-081355ET
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