Presentation on theme: "Fed, MBS and You “When the facts change, I change my mind” – John Maynard Keynes."— Presentation transcript:
Fed, MBS and You “When the facts change, I change my mind” – John Maynard Keynes
Objectives 1. An update on the fundamentals of the U.S. housing market 2. Analyze the effect of the end of the MBS purchases on credit markets and long term rates 3. A look at the current MBS holdings of the Fed and a viable exit strategy to these positions.
New Home Sales Up 26.9% in March, 411,000 annualized units
Home Sales Jump in the South
Existing Home Sales
Housing Prices Stable
“Glut of Trouble” – WSJ "How much of the strength in the housing market is just the perception of government support?" he said. "I do have concern about a double dip.“ – Robert Shiller (Yale) At the current rate of sales, it would take almost nine years to work through both the real and "shadow" inventory. “Supply >> Demand” – Goldman Sachs
What is a Mortgage Backed Security (MBS) RMBS – Residential Mortgage Backed Securities CMBS – Commercial Mortgage Backed Securities CDO – Collateralized Debt Obligation
Main Credit Indices ABX.PRIME.AGG What have treasurys done? What have 30 yr rates done
30 yr Fixed - National Average
30 to Treasury Spreads
Long term real rates
CMBS Delinquency (CRE Market) RealPoint: March delinquencies hit an all time high up 6% TREPP: This number is even worse, at nearly 8%, after the single biggest monthly spike in 30 day + delinquencies.
Prime RMBS Delinquency U.S. Prime RMBS delinquency now over 10% Increased for 34 th consecutive month Jumbo RMBS delinquincy 10.1% in Mar (up from 4.8% yoy) Subprime RMBS delinquency rate actually fell in Mar 46.3 from 46.9 in Feb, but still well over 39.8 yoy First decline in 4 years! (Could be seasonal anomaly
Fed MBS Purchase Program GSE Agency Guarantees - Fannie, Freddie, Ginnie Mae explicitly guaranteed by the govt. What is the purpose of these guarantees, when/why did they start Goal to help lower borrowing costs $15-25 B a week! Purchases as a share of gross issuance have ranged around 60 percent
Fed Holdings of MBS At $1.1 trillion in holdings of mortgage debt guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, the Fed owns roughly a fifth of all these outstanding instruments.
Current Balance Sheet
What can you do with 1.1 T MBS? Reverse Repo - Temporarily drains funds from system Dealers offer interest rates at which they would lend money to the Fed versus the Fed’s Treasury general collateral (MBS) Hold to Maturity Sell on Market
Hold to Maturity Fed has indicated these purchases were a temporary measure to stabilize the housing market and will be off- loaded to public hands as soon as possible. Positions were bought on the cheap and have been profitable. As rates rise, positions will fall in value
Fed’s Interest Rate Exposure Fed’s DV01 is $1-1.5 Billion (Gain/loss per BP) – Alan Boyce, former Fed member ≈75 Billion loss for first 50 bps, What is the cost of hedging? Interest rate swaptions, 3yr into 7yr 142 Billion – according to professional MBS trader Fed doesn’t mark to market, but on a cash basis they go negative carry in 2015 (3 mo financing rates go above 5%)
Sell Sell Sell 81.5% of their portfolio is 30yr 4.0 coupons,4.5 coupons, and 5.0 coupons. If the Fed decided to sell they would drastically erode the value of their own holdings. Overwhelm market
Takeaways From Ben’s Testimony When Fed begins to sell assets, must do it in a gradual, predictable way (communication and transparency) Fed not adding any credit risk by holding GSE MBS (because underwriting standards much tighter in 2009 and 2010) Fed would like to get back to all-treasury portfolio in reasonable period. Fed will be returning “Unusually Large" amount of money to Treasury in near term due to mortgage investments.