Central Banks Cut Holdings of U.S. Agency Debt by 7% This Week

September 22, 2010 by · Leave a Comment
Filed under: Economic News 

There is a very interesting statement in this news piece.  The writer said that investors in agency debt like mortgage bonds backed by Fannie & Freddie were cutting their holdings because the worry that the U.S. will push the refinance of mortgages that are underwater and borrowers that have no equity.

What is interesting is if they do not refinance these borrowers then many will default on their loan.  If this happens then the available income for the mortgage bond payments would be less so you would think that this would be an undesirable effect if you were expecting payment from these bonds.  If you did refinance then you would have more income to make these interest payments.   Another problem with the defaults would be th affected value of homes around them and that could create more defaults.   So the question is why would an investor sell agency debt if that was the was the real reason.

This seems like a pretty weak argument for correlating this 7% sellout and actions by the U.S. government.  More likely it is because of our fiscal and monetary policy and they want to reduce their exposure to the U.S. dollar.   The Federal Reserve is actively talking about doing more quantitative easing (money printing) and this is worrying investors in U.S.  assets about the coming devaluation.

Bloomberg – Central banks outside the U.S. are among investors that cut holdings of debt from government- related companies including Fannie Mae and their mortgage bonds by $57 billion in a week, according to Federal Reserve data.

Concern the U.S. government may hurt mortgage bondholders by acting to boost home refinancing partly prompted official foreign investors to reduce their holdings to $752.5 billion on Sept. 15, Nomura Holdings Inc. analysts said. The portfolios reached a weekly average of $831 billion in early August and have fallen below the $769 billion recorded at the end of 2009, according to data compiled by Bloomberg.

Most of this week’s plunge likely reflected maturities of short-term agency corporate debt, the analysts wrote today in a note to clients. “A small portion” of the decline probably stemmed from investors completing mortgage-bond sales arranged in August amid speculation the U.S. might try to increase refinancing among consumers with no home equity or relatively poor credit, Nomura said.

“At least some of that seems to have happened,” Ohmsatya Ravi, the New York-based head of Nomura’s U.S. securitization products research, said in a telephone interview. “When the higher coupon bonds were lagging a lot, we did hear that overseas investors were selling.”

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