The unsettling Capitol Hill testimony that sent Fannie Mae and Freddie Mac's mortgage-backed bonds into a tailspin last month has helped Ginnie Mae's securities.
Monday morning, Ginnie Mae 7.5%-coupon bonds were trading at 27/32 of a point higher than comparable Fannie Mae issues. Back in January, the same Ginnie bonds had been trading 5/32 lower than the Fannie Mae issues.
On March 22, Gary Gensler, under secretary of the Treasury for domestic finance, told a House Banking subcommittee that he supports certain provisions of a bill - introduced in February by Rep. Richard Baker of Louisiana - that would amend the regulation of Fannie and Freddie. In particular, he endorsed a proposal to eliminate the two government-sponsored enterprises' conditional line of credit with the Treasury. This line of credit is the basis for the market's assumption that if Fannie or Freddie were ever to encounter financial hardship, the government would bail them out.
The implied guarantee has enabled the GSEs to borrow at lower rates than most companies and to market their debt as an alternative to U.S. bonds at a time when the Treasury is borrowing less. Ginnie's securities, on the other hand, have an explicit guarantee, not an implicit one like Fannie's and Freddie's.
Worried by Mr. Gensler's testimony, investors stampeded out of Fannie and Freddie issues, and many put their money in Ginnie's securities.
In a recent research report, however, Goldman Sachs analysts wrote that Ginnie bonds are unlikely to maintain such high prices relative to Fannie Mae and Freddie Mac issues, because the latter are expected to recover over time. The investment bank advised clients to keep a smaller percentage of their portfolios in Ginnie mortgage-backed bonds.
Other factors fueled the surge in Ginnies.
Some speculated that the Federal Home Loan Bank System's decision to buy FHA loans directly from originators would reduce the supply of Ginnie securities, driving up prices. And some investors were favoring Ginnie issues now that Fannie and Freddie's implied government guarantee is perceived to be in jeopardy.
However, Goldman said, neither of these developments justifies the current price difference between Ginnie's bonds and those of the two GSEs.
After his remarks caused havoc in the markets and Fannie and Freddie publicly criticized him, Mr. Gensler sought to mitigate the impact of what he had said. The next day he said his remarks were "consistent with long-standing administration principles in this area and [did] not represent a change in the government's relationship with the GSEs."
Some analysts say they are unfazed by the Baker bill, despite the recent turmoil.
"While it did manage to spook the bond markets, most investors think that the passage of Baker's bill is a very low possibility," said Kenneth A. Posner, an analyst at Morgan Stanley Dean Witter. "What congressman wants to go to his constituents and say, 'I've succeeded in raising home-ownership costs?' "
