Mortgage bonds rally as Fed says sales aren’t immediate
THE Federal Reserve (Fed) said it’s holding off on starting to sell its US$2.7 trillion (RM12 trillion) of mortgage bond holdings, which is encouraging at least some investors to buy the securities.
The Fed is looking to winnow down its mortgage bond holdings as it tries to cut its balance sheet in general. For now, it’s effectively stopping reinvestment of principal payments it gets, but in the minutes to its March meeting, it said at some point it will make sense to look at selling off its securities.
The central bank is by far the biggest owner in the US$9 trillion (RM41 trillion) US mortgage bond market, and its efforts to cut down its holdings will have a huge impact on valuations for other investors.
Trying to guess exactly when the selling starts, if it happens, has become a popular parlour game across Wall Street.
On Wednesday, Fed chair Jerome Powell said sales are “not something we are considering right now,” and not something he’s expecting to consider in the near term. Now money managers, hedge funds and real estate investment trusts are feeling more comfortable buying the bonds, said John Kerschner, head of US securitised products at Janus Henderson Group.
Mortgage bonds gained 0.4% on Wednesday, according to Bloomberg index data. The Fannie Mae 30-year current-coupon spread to a blend of five and 10-year Treasuries, a barometer of risk premiums in the market, narrowed 0.04 percentage point on Wednesday, a steep move.
“The fear of potential sales has weighed on the markets as a whole, and is a big reason why mortgages have under performed by as much as they have over the past two months,” Scott Buchta, head of fixed-income strategy at Brean Capital, said on Wednesday.
“Powell’s answer today has given investors some room to breathe, at least over the near term.”
Citigroup said it now expects sales to start in April 2023, where its previous base case was November. It also thinks it’s possible the central bank may never sell.
If the Fed wants to cut its holdings in mortgages materially in the next few years, it may have to sell. Mortgage rates have surged this year, with the 30-year level reaching 6.29% this week, its highest since October 2008, Freddie Mac said.
Homeowners have little incentive to refinance their mortgages now, and may be more reluctant to move, meaning investors are seeing their principal payments coming in slower than they have in recent years.
Banks – which own about a third of the market – are cutting back on buying the bonds as their deposits fall, wrote Erica Adelberg, MBS strategist at Bloomberg Intelligence, in a research note last week.
It’s still not clear which group of investors will step in to buy more as the Fed and banks pull back from the market, although some relative value investors may be growing more interested given where spreads are, she wrote.
Elsewhere in credit markets: America’s five corporate bond issuers, including Citigroup Inc, were looking to sell investment-grade securities on Thursday.
Citrix’s debt debacle may be just the beginning of the pain for Wall Street, as bankers face more losses on upcoming deals, job cuts, and lower bonuses.
Royal Caribbean Cruises Ltd is tapping the US corporate high-yield bond market to help refinance debt the company has coming due next year.
A group of banks led by Goldman Sachs Group Inc launched a leveraged loan sale that will support Latam Airlines Group SA’S exit from bankruptcy.
A persistent deterioration in global risk sentiment, along with numerous central bank decisions, overshadowed Europe’s credit market on Thursday, with just one issuer selling bonds. Joint Agencies, a debut issuer comprising three regional German banks, sold a 500mil
(Rm2.25bil) seven-year social bond. — Bloomberg