THE BASIS POINT

Strong MBS Demand Holds Rates Down

 

Yesterday the Fed, in conjunction with the European, Canadian, England, Japan, and the Swiss National Banks arranged for a dollar Swap agreement lasting through the middle of 2013 to make it easier for the European banks to get dollars by borrowing from their Central Bank, the ECB. This removes the liquidity fear that when a European bank needed to borrow dollars in the overnight market, the international reserve currency, they could do so through their Central Bank at reasonable rates. The lack of liquidity in 2008 is what precipitated the collapse of Lehman and that triggered the panic banking crisis in our country. But remember that liquidity is different than credit!

So the Dow rallied nearly 500 points, mortgage prices barely budged, and in fact some lenders/investors had rate improvements. Treasury rates went up very slightly but it is easy to see how financial news like this can jar markets, often more so than weekly or many of the monthly numbers that are released here in the United States. No doubt about it: MBS prices are benefitting from solid demand and limited supply.

In fact, Ginnie Mae’s president Ted Tozer, who I was fortunate to meet at an MBA conference a few weeks ago, noted that Ginnie Mae bonds may be near a peak in price relative to Fannie Mae and Freddie Mac MBS’s but foreign investors and others demanding an explicit government guarantee will continue to bolster demand. Per Mr. Tozer, Investors that buy Ginnie Mae bonds are beginning to find that the favorable capital treatment on the federally backed securities may be fully offset by the higher prices that they must pay.

 

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