Mortgage Risk Premiums At Pre-Crisis Levels
By Andrew Edwards, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Agency mortgage-backed securities ended the day at
their lowest risk premiums since before the failure of two Bear Stearns hedge
funds in July 2007 set off a precipitous decline, according to FTN Financial.
The bonds, bundled mortgages issued by housing giants Fannie Mae, Freddie Mac
and Ginnie Mae, ended the day 5 basis point tighter to a blend of 5-year and 10-
year Treasury bonds, at 128 basis points - the smallest risk premium, or spread,
since July 5, 2007.
"It's about as tight as I expected it to get this cycle," said Walt Schmidt,
manager of structured product strategies at FTN Financial. At the height of the
housing bubble spreads never got much tighter than 100 basis points, Schmidt
said.
As spreads have tightened across all fixed-income asset classes, mortgages
have begun to look more attractive, investors say. Meanwhile, more of the money
that has been piling into bond investment funds has been finding its way into
MBS, more than picking up the slack as the Federal Reserve has cut back the pace
of its purchases.
"This is money trying to find a home," said Michael Cheah, senior portfolio
manager at SunAmerica Asset Management. "People realize that it makes sense to
take profits high yield [and investment grade debt] and move into the laggard -
that's mortgage backed securities."
The Federal Reserve has bought some $1 trillion of the bonds in the past year,
80% of its planned purchase, which is set to wrap up in March.
The tightening belies continued questions about the housing market and the
fate of the now-government controlled securitization giants that service it.
Fannie and Freddie were both put under government conservatorship last year
when losses on their mortgage purchases made them technically insolvent, and the
government hasn't said how it intends to dispose of them.
The housing market itself appears to have stabilized of late. Serious
delinquencies in Fannie Mae's portfolio slowed in the third quarter for the
second consecutive quarter, and loss severities have held steady, according to a
report compiled by FTN. However, foreclosures continue to mount and home prices
continue to fall, despite the massive intervention.
- By Andrew Edwards, Of Dow Jones Newswires; 212-416-2228; andrew.edwards@
dowjones.com
(END) Dow Jones Newswires
11-13-091717ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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