By the end of the program of the U.S. Federal Reserve worth 1.25 trillion dollars to buy mortgage securities guaranteed by Fannie Mae and Freddie Mac, investors behave with surprising calm.
And just a few months earlier, many worried that without the continued intervention of the central bank, mortgage loans can be quite expensive and discourage potential buyers, driving the market for a new recession. Now, exit the Fed is seen no more than a minor episode. Such events may be a sign that the financial system again seeping confidence.
Of course, there are reasons for an optimistic point of view of investors, and the timing was just as much. First, many traditional buyers of these mortgage-backed bonds or left out of the game, or buy fewer bonds than allow their portfolio. According to Credit Suisse, they, along with index funds, now account for 18% of the market, down from 25% before the Fed came into the game.
However, most are not now a huge selection of alternatives for investments that would meet their strict criteria, which means it can fill the empty space left by the Fed. Banks with cash reserves after raising their level of capital is also attractive to potential buyers, said that the owner of JPMorgan, Jamie Dimon (Jamie Dimon) at a conference last month.
Bondholders are also hoping to catch the wind. According to Credit Suisse, Fannie and Freddie back in the hands of mortgage investors, 136 billion dollars between April and June, because the moment they purchase bad loans from mortgage pools underlying the existing bonds. This should ease the way the Fed. If we assume that investors get paid back in the market, those dollars would be enough to replace the central bank's recent purchase of three to four months.
Still, market observers are likely to think that the end of the program of the Federal Reserve will have some impact. Many expect the spreads of mortgage securities, or the risk premium increased only from 0.15 to 0.2 percentage points, which would be a slight deviation from about 1.5 percentage point narrowing of spreads since the peak of panic in November 2008. There is too much money waiting for the weakness of the market and that his attack when spreads rise more than stated.
This may be true. But here's the question: Should investors were so keen to mortgage securities, are precisely will not get them at a low price, even if prices fall below the expected level? Over the past 15 years, mortgage spreads, combined with the Treasury maturities, reached an average of 1.45 percentage points from the expected value without the help of the Fed. It is hardly in such a situation, the transaction will be possible.
Moreover, the Fed seems to be slowly changing its attitude to the conservation of purchased mortgage-backed securities. In public statements last week, Fed Chairman Ben Bernarke and several colleagues, seemed to pay more than expected, attention to asset sales, as the method of the Central Bank to exit from the extraordinarily soft policy.
Nobody expects the Fed's emergency sale of its securities, it would be foolhardy, given the fragility of the housing market and a consistently high level of unemployment. However, since the Fed now owns about 25% of outstanding mortgage bonds, any talk about the actual sales have far greater concern than if the Fed simply stopped buying.
The risk of interest rates also looms large. As the economy grows, interest rates should also rise. This means that a smaller number of U.S. borrowers will repay their loans early and investors will keep bonds longer than expected, which will be a potential cause of discrepancy between the financing and timing of assets. Moreover, it can lead to a drop in bond prices, creating losses, at least on paper. Of course, investors can hedge the risks on interest rates, but it has never been an ideal insurance for mortgage securities.
And finally, frightened by the behavior of financial markets should give investors pause. Not only because of what happened with the yield on the last week, but also because of the ratio of interest rate swaps, the main instrument of the mortgage market to hedge against interest rates falling below the yield of Treasury securities, this accident could make the hedge less effective. Alarm calls are not yet apparent, but this is a timely reminder to investors that are relaxed due to the fact that the Fed comes out with the mortgage market that the more traditional risks are still not gone away.
Reuters, Mar 30
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