Demand for mortgage-backed securities cooled slightly on Monday after rating downgrades of the U.S. and government-backed housing finance companies led to a broad flight from riskier assets and fed concern that borrowing costs for major investors will rise.
But mortgage rates may be unaffected as the $5 trillion MBS market generally weathered the downgrades by Standard & Poor's, which directed the spotlight on the sluggish economy and dealt bigger blows to stocks and other nonguaranteed assets, analysts said.
Overall, analysts downplayed the impact of downgrades on the $5 trillion in "agency" MBS that, unlike Treasuries, hold no ratings and are secured by houses. Payments on the bonds come directly from homeowners, except in the case of a borrower's delinquency, when guarantees from Fannie Mae, Freddie Mac or the federal government kick in.
Prices on MBS issued by the government-sponsored Fannie and Freddie rose, only lacking the draw of Treasuries as a safe haven, said Kevin Jackson, a trader at Wells Fargo Securities in Charlotte, N.C. Fannie Mae's MBS paying 4% climbed about 20/32, lagging the gains in the benchmark 10-year Treasury by about 1 point or less, after adjusting for hedges.
"Flows have been fairly manageable," said Bryan Whalen, a managing director at TCW in Los Angeles. "All the volatility we see in rates causes dealers to pull back and not take a lot of positions," which may have magnified the impact of one large seller, he said.
S&P on Monday cut credit ratings of Fannie and Freddie, which were placed under federal control in September 2008 and have cost taxpayers $141 billion.
