Flight to Quality Has Agency MBS Singing the Blues

Resurgent investor concern about banking and the economy hasn’t just hurt the stock markets — it’s caused a widespread roiling of debt and bond markets, as well, a trend that has clearly caught up agency MBS in the past few days. According to data from UBS, the spread on Fannie Mae current-coupon fixed-rate securities versus interpolated 5 and 10-year Treasury notes jumped up to 288 basis points on Thursday, the highest level since the government announced it was placing both GSEs into conservatorship with the Federal Housing Finance Agency. “It’s general turmoil in financial markets and the deleveraging going into the year end,” Art Frank, director and head of agency mortgage-backed securities research at Deutsche Bank, told Reuters in an interview Thursday afternoon. “There are just no buyers.” As Frank suggested, this week pretty much anything to do with the GSEs has been caught in the crossfire: the difference between yields on Fannie five-year debt and Treasures had widened to a record 158.5 basis points yesterday, for example, after earlier rising as high as 172 basis points, according to a Bloomberg report. “The candidate for most popular vanity license plate for 2009 will be DE-LEVER,” said one email from a trader late yesterday afternoon. The problems affecting fixed-income markets are myriad, and include anxiety about competing debt guarantees coming from the Federal Deposit Insurance Corp. The FDIC has said it will guarantee newly-issued senior unsecured debt of banks, thrifts, and certain holding companies, and provide full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount; but precious little details exist on implementation thus far, leaving MBS traders in limbo, various sources suggested Thursday. The FDIC board of directors is scheduled to meet on Friday to consider a final rule on the so-called Temporary Liquidity Guarantee Program, and the regulator will hold a conference call after market close to discuss the final rule with market participants. Beyond competition from FDIC-insured debt at home — which may yet prove to be a temporary problem for the secondary mortgage market — a looming lack of interest abroad is also allegedly hurting agency MBS, and may prove to be more damaging in the long run. A story at bond market news service Market News International suggested Thursday that Chinese investors have been fleeing both agency debt and securities, with a government economist suggesting to the news service that the Chinese government has “no confidence in the future of Fannie Mae and Freddie Mac.” To offset weakening overseas demand, Treasury-led buying of GSE debt and securities has been soaring, according to data released earlier this week. Treasury holdings have soared from $541.1 billion in August to $585 billion in September, Market News reported. Write to Paul Jackson at [email protected].