Fixed Income Recap

Fed Announces MBS Buying Spree
The Fed beefed up its efforts to support the suffering credit market today by announcing a plan to begin buying $100 billion of Fannie and Freddie debt starting next week and $500 billion of GSE guaranteed MBS starting next month.

Fannie and Freddie participate in open market operations regularly. They buy and sell securities to maintain a desired level of liquidity in the market. They were taken into conservatorship in part because the Treasury wanted to make sure they would be able to continue such operations. The Fed program announced today, coupled with the acceleration of MBS buying by the GSEs to support the mortgage market while in conservatorship, leads many to believe that full nationalization of Fannie and Freddie is a likely to come after the dust settles.

Fannie, Freddie and Ginnie own or guarantee about $4.5 trillion of MBS combined, putting the announced Fed buying program at over 10% of the market. In an environment when agency MBS have been struggling to find buyers, a purchasing program like this is very significant.

The market liked the news initially as 30 year MBS outperformed Treasuries in early trading, but interest tapered off as the day went on. The long term effect of the program will likely be positive for MBS, as some of the supply is absorbed by the Treasury, but they will continue to be volatile.

FDIC Corporate Bond Guarantee
The 3 year $5 billion Goldman Sachs issue mentioned yesterday was priced today at 200 basis points over Treasuries, about a 3.6% yield. The issue was well received by investors as the yield tightened about 15 basis points to Treasuries in today’s trading.

This FDIC insured corporate bond market is new, and many remain skeptical. The credit is being viewed as similar to FDIC insured bank deposits, without the $250k cap, but with $5 billion in this issue alone, liquidity stands to be better than CDs. We would expect investors to remain unsure of the true value of bonds such as these until more institutions issue debt under FDIC’s program.


Cliff J. Reynolds Jr.
Junior Analyst