The Fed will be buying up to $600 billion in debt and MBS backed by Fannie Mae and Freddie Mac. Yeah, that’ll move the market. Today we had Agency debt 30-40bps tighter, swaps about 15bps tighter, and MBS about 35bps tighter.
Here is the quick take from that. I love agency and MBS debt for long-term holders, but I’d probably wait for this to settle out before buying anything. This week is classically a poor liquidity week, and we’re living in a poor liquidity market. So every event is going to result in outsized moves. You are smarter to buy on the second round, not the first.
Also this should be effective in lowering mortgage rates. Already I’m hearing borrowing rates should be down around 5.5% after today’s move. But given where the 10-year Treasury is, mortgage borrowing rates should be able to drop down below 5%. That would help a lot in creating a refi-wave as well as improving housing affordability.
Meanwhile, Goldman priced their FDIC insured deal today at 3-year +220. Immediately traded down to +200. Morgan Stanley, J.P. Morgan, Citigroup, and Bank of America should all be coming with similar deals either this week or next. As I predicted, this came cheap to Agencies by about 20bps.
Will the liquidity be decent in these FDIC deals? I don’t see why not. Will it be as good as Agencies? Not at first. Various funds that have “government” mandates may not be able to buy this paper without some sort of approval from council or a board. That may take a few months, but eventually I think actual “full faith” paper (FDIC) will trade tighter than “implicitly” backed (Fannie/Freddie) paper.
It is entirely possible that the Treasury eventually puts a full faith backing on the GSEs, which would negate the above statement. So I’d say at even spread, I like the FDIC paper. If GSE paper is wider, I prefer the GSE.
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