Mortgage Investors Await Fed's Next Move On Bond Purchases
September 23 2009 - 2:59AM
Dow Jones News
After months of predictability, investors in mortgage bonds
backed by housing finance giants Fannie Mae, Freddie Mac and Ginnie
Mae face a measure of uncertainty as they await details of how the
Federal Reserve plans to wind down its $1.25 trillion program to
buy these bonds.
Market participants are hoping for some indication from the
Federal Open Market Committee meeting on Wednesday on how it will
play its hand. So far, the Fed - which has become the largest buyer
of mortgages - has played its cards close to its chest, and the
market is uneasy not knowing.
The central bank's purchase of these so-called agency mortgage
bonds since the start of this year has provided stability in this
$5 trillion corner of the credit market. Risk premiums, which hit
283 basis points last year at the height of the credit crisis, have
since narrowed by nearly 140 basis points. That has kept mortgage
rates for homeowners at reasonable levels; rates on fixed rate
30-year mortgages were recently 5.22%.
Together with the first-time home buyer credit, the Fed's
actions have contributed to the better-than-expected home sales
this summer and continued signs of stabilization in the housing
market.
So far this year, the central bank has bought $861.95 billion,
more than two-thirds of its planned outlay. Market participants
have begun to fret about what will happen without the Fed.
"We are getting very nervous," said Didi Weinblatt, USAA's vice
president of mutual funds portfolios, who runs both a Ginnie Mae
fund and a general fund that carries 15% in agency mortgage
bonds.
"They should make some signal soon, as they are an awfully big
buyer in the MBS market," she said.
There are some who think it's time for the central bank to exit
the market. Others say such an abrupt end would undo the Fed's
efforts to keep mortgage rates low and instead suggest a gradual
wind down of its purchases and an extension of the program into the
early months of next year.
The Fed, however, has paid little heed to these calls and
continued to buy steadily at a pace of $5 billion a week, just as
it did at the start of the program.
"We expected to see a slow down, but there's been no sign of it
yet," said Art Frank, a mortgage strategist at Deutsche Bank.
Most market participants are confident that there will be no
drastic policy move because the housing recovery is still in its
infancy. Also, the Fed wouldn't want to rattle foreign investors,
mostly central banks and state owned funds, who own about one-tenth
of the agency MBS market.
"There are too many foreign holders to do anything disruptive,"
Weinblatt said.
Domestic portfolio managers and private investors have turned to
sellers of these bonds in recent months. Pacific Investment
Management Co., which runs the largest bond fund in the world, the
Total Return Fund, pared its holdings of mortgage debt to 54% from
66% in the second quarter in response to narrowing risk
premiums.
"The strong rally in these securities has driven yield premiums
closer to fair value," PIMCO said.
Institutional investors may benefit from waiting for the Fed to
exit the market. Risk premiums are expected to widen by 50 basis
points on the Fed's exit, according to Laurie Goodman, mortgage
strategist with Amherst Securities.
That could present a buying opportunity.
-By Prabha Natarajan, Dow Jones Newswires, 212-416-2468;
prabha.natarajan@dowjones.com