Sunday, October 11, 2020

Treasuries on steroids

Reuters' Kate Duguid and Lawrence White reported that banks are on track for a record year of revenue from trading agency mortgage-backed securities. Since a peak in the risk premium between agency MBS and Treasuries in March 2020, the Fed has bought more than $600 billion of agency MBS, narrowing spreads by 0.50%.

Agency-backed securities are backed by the US government, so they don't face default risk, but pre-payments can keep their price down. Whereas a decrease in yields automatically increases the price of an outstanding Treasury bond, it can induce more mortgage borrowers to refinance loans, which shortens the duration of the agency MBS and reduces the number of installments paid.

"But banks are likely to keep buying. Though they may be overtaken by the Fed this year, commercial banks are still currently the largest holders of agency MBS. Flooded with deposits during the coronavirus crisis, big banks have put that money to work in agency MBS, among other securities, bringing their holdings to $2.3 trillion according to Fed data."


"There is just insatiable demand for agency mortgages by all the depository institutions. And deposits are up. Savings rates are up. Everyone is kind of hoarding cash." 

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