Bonds Backed By Home Loans Buoyed By Govt's Toxic Asset Plan
July 21 2009 - 2:44PM
Dow Jones News
The Treasury's plan to deal with toxic home-loan-related debt on
bank balance sheets has raised some skepticism in the financial
industry, yet it is having an impact on one market: that for bonds
backed by home loans.
Since the government last week - after some delay - announced
the selection of nine fund managers to run funds seeded with public
and private money that will invest in these securities,
home-loan-backed debt has been gaining steadily in price, sending
yields lower.
Importantly, these gains are taking place in the market that
deals with loans that aren't backed by housing finance giants,
Fannie Mae (FNM) and Freddie Mac (FRE). This part of the market -
the private-label residential mortgage-backed market - hasn't
benefited from Federal Reserve purchases or other support measures,
yet its revival is necessary for mortgage lending to pick up,
mortgage rates to decline and the housing market to heal.
The nine fund managers have up to 12 weeks to raise at least
$500 million of capital each from private investors. The Treasury
will then match this capital and provide debt financing up to 100%
of the total equity in the partnerships.
Prime, riskier Alt-A and risky subprime bonds have all gained as
confidence has returned and investors, in the knowledge that there
will be buyers for these securities, are more willing to trade.
One market participant noted several so-called bid lists -
offers to sell securities - were circulating in the market Tuesday
as investors took advantage of the new-found demand to sell.
"The bidlist activity in a frenzied rally is to be expected," he
wrote in an e-mail.
The gains in home-loan-backed bonds mirror the impact of other
government programs aimed at reviving struggling parts of the
credit market, including the Federal Reserve's efforts to support
the markets for consumer-loan-backed debt and securities backed by
commercial mortgage loans.
The programs "put a floor on the price of these bonds," said Dan
Nigro, a portfolio manager at Dynamic Credit Partners in New York,
adding that the knowledge that there's a buyer for these securities
gives market participants the incentive to trade them.
When the Fed's Term Asset-Backed Securities Loan Facility, or
TALF, was expanded to include existing commercial mortgage bonds,
it started "a significant rally" in those securities, said Darrell
Wheeler, head of securitization research at Citigroup. Risk
premiums on TALF-eligible CMBS tightened sharply to under 400 basis
points from 700 basis points two weeks ago, Wheeler wrote in a
note.
"PPIP-eligible CMBS and RMBS have just started to see some of
their rally as PPIP is approaching actual implementation," Wheeler
wrote. PPIP refers to the public-private investment partnerships,
the official names for these funds.
The bonds "still have anywhere from 10 to 15 points to rally as
PPIP gets fully functional," Wheeler wrote.
-By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227;
anusha.shrivastava@dowjones.com