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The US mortgage bond market is in an uproar, awaiting the Fed’s sinking relief


Times Square in New York City as coronavirus deaths rise. Getty Images

Getty Images

Investors say it looked very similar to 2008 in most of the $ 11 trillion US home finance market, only without the defaults.

Many of them attribute credit to the Federal Reserve’s swift action last week, which opened its time to unleash trillions of dollars, calming some of the shocks of the spread of the coronavirus epidemic and its expected tribute to the nation and ‘economy.

SeeHere is a breakdown of the Fed’s bailout programs to maintain credit flow during the pandemic

The central bank’s initial plan was to purchase at least $ 700 billion in Treasury debt and agency mortgages, or where most of all home loans are grouped in securities with public support.

But investors continue to recover from the quickest selloff of their careers and also claim that safe haven activities, including agency mortgage bonds, continue to be a sales target as investors seek to accumulate liquidity in the event of market carnage and the last week’s record bond fund outflows are not over yet.

“There are still many more people who sell for liquidity, which is first and foremost,” Steven Oh, global manager of fixed income at PineBridge Investments in Los Angeles told MarketWatch. Although “the cost of transactions has improved,” he said. “It’s still not ideal.”

To read: Unemployment could reach 30% in the United States, says the Fed’s Bullard of St. Louis

US Treasury Bonds and Mortgage Bonds have been rewarded for safer and more liquid havens during stormy periods so far.

This chart by BofA Global Research shows how terrible Treasury market liquidity has been in the past few days:

Trying to trade agency mortgage bonds has been slightly better, unless an investor is willing to sell bonds at a value lower than their recent value.

But hope remains that the Fed’s combination of emergency loan programs and asset purchases will be sufficient to bring further calm, although the Senate failed to remove the first hurdle of a massive coronavirus stimulus measure and equity futures on Sunday. Americans have plummeted again.

In addition, President Donald Trump, in the face of criticism for his response to the coronavirus, also on Sunday ordered the National Guard in California, New York and Washington to help manage the pandemic. New York City, the center of global finance, also ordered its 8.5 million residents to stay home from work as the state prepared to become a hot spot in the global pandemic.

“I think the Fed will continue to buy mortgage bonds until there is some sort of normalcy,” said John Kerschner, head of the United States’ structured products at Janus Henderson Investors in Denver, in an interview with MarketWatch. “Who knows when it will be.”

The $ 6.9 trillion agency mortgage bond market is typically one of the most sought after havens in U.S. finance, largely because government guarantees provide investors with significant coverage of losses, with the exception of any premium on bonds that trade above their $ 100 repurchase price.

Last week alone, the Fed purchased more than $ 300 billion in government bonds and agency bonds, or MBS, pledging to buy at least $ 500 billion in assets on Sunday night.

While this makes the Fed (again) the “lender of last resort”, analysts at BofA Global Research said Sunday they expected the central bank to further increase its market intervention and implement a “full and unlimited backstop on the MBS market. of the agency “in the days and weeks ahead, as well as other stabilization measures.

It is “time to unleash the entire Fed arsenal,” urged the BofA team led by Mark Cabana, in a client note. “What started as a health crisis quickly turned into an economic crisis and is likely to quickly become a housing / financial crisis.”

Check out: Here’s how a Fed plan would work to support the corporate and municipal bond market


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