Rates have come down dramatically , but the spreads are expanding against agency debt instruments.
The comments by Treasury undersecretary Gensler that quasi-Govt debt such as Fannie Mae's, Ginnie Mae's and
Feddie Mac's may no longer be backed by the full faith and credit of the US Govt. is an unusual policy shift, if it occurs. It may provide some trouble for the US markets down the road.
If banks and other financial institutions have to reduce a percentage of there agency debt it will lead to rising borrowing
costs and will have a negative money multiplier effect, which will be negative for money creation and bearish for equities. Just as Govt debt reduction has deflationary implications.
But we should be making hay while the sun is shining -g-
I don't see larger problems until the May or Jun period,
currently. The strong US Dollar will help our markets for
now.
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The rally has its roots in a speech Wednesday by Treasury Under Secretary for Domestic Finance Gary Gensler, who said banks hold far too much debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. He urged Congress to limit those holdings.
Mr. Gensler also said the Treasury supports a legislative provision ending conditional lines of credit that government-sponsored enterprises have had with the Treasury.
The remarks led to concerns that government-sponsored enterprises, such as Fannie Mae and Freddie Mac, might no longer enjoy the implicit full faith and credit of the U.S. government. This suggested to some investors that agency bonds may not replace Treasurys as safe-haven investments.
While the conditional lines of credit that Fannie Mae, Freddie Mac and the Federal Home Loan Bank System can draw on from the Treasury are largely symbolic, investors were still troubled by Mr. Gensler's remarks.
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---Front End Bid Similar to the price action we saw yesterday, the front end has been well-bid again this morning. Although no one we spoke with has really had a decent explanation for the firmer tone, the best guess is that is flight to quality interest largely related to concerns that agency credit lines will be repealed, possibly damaging the AAA credit ratings of issuers such as Fannie Mae and Freddie Mac. |
