Mortgage Bond Buying Intensifies, Premiums Tighten 28 BPs
11/25 09:24 AM
NEW YORK (Dow Jones)--Risk premiums on mortgage bonds and debt issued by Fannie Mae (FNM:$0.4901,$0.1501,44.15%) and Freddie Mac (FRE:$0.619900,$0.169900,37.76%) tightened drastically Tuesday morning as buyers returned multifold to the market.
"It's a big event that the Federal Reserve is offering to buy up nearly 10% of the agency mortgage market," said Art Frank, a mortgage strategist with Deutsche Bank (DB:$31.8300,$1.1500,3.75%) .
Tuesday morning, the Federal Reserve announced that it would buy up to $500 billion of mortgage bonds guaranteed by Fannie, Freddie and Ginnie Mae, providing the ultimate support to prop up the $4.8 trillion market of these securities. The central bank also will buy $100 billion of the mortgage finance companies' debt securities, including that of the Federal Home Loan Bank, through reverse auctions starting next week.
So far, other initiatives to prop up the market including a plan to have both the government-sponsored enterprises buy nearly $200 billion of these bonds and the U.S. Treasury's unlimited purchase of these bonds have done little to stop the weakening of risk premiums on mortgage bonds. As a result, mortgage rates have remained at elevated levels with little relief to consumers.
Tuesday morning, however, was a different story with risk premiums on these mortgage bonds tighter by 28 basis points on the back of the Fed support.
The hope is that this would translate to lower mortgage rates. However, the rapid gapping out of Treasury yields may temper the fall, market participants say.
Meanwhile, Fannie and Freddie debt securities tightened up to 40 basis points in the secondary market.
Risk premiums on Fannie's 3-year benchmark note were 28 basis points tighter at 145 basis points, while the Freddie Mac's (FRE:$0.619900,$0.169900,37.76%) 10-year bond was 32.5 basis points tighter at 127 basis points.
These debt securities have been slammed in the past couple of months on investors' concerns over the extent of government guarantee on this debt, and the future of the two mortgage giants. Further, the launch of new government- guaranteed bank debt created a competing asset class that potentially could lure away traditional buyers of Fannie and Freddie debt.
-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@ dowjones.com
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11-25-080924ET
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