Debt ceiling deal welcomed by mortgage bond market
Congress managed to set aside differences long enough to draft an agreement on the nation's debt ceiling, signed by the president on Tuesday. As a result, ratings agencies immediately confirmed the nation's triple-A status. However the new plan will lead the U.S. into further austerity, with more cuts to federal spending, in a development that is likely to suit the mortgage-backed securities market well, according to Deutsche Bank (DB) securities analyst Steven Abrahams. "The solution this week to U.S. debt and deficit problems may help MBS by keeping selected housing markets soft and delinquency rates high — both significant impairments to borrowers’ ability to refinance," he said in a note Wednesday to clients. "And as the last few years have shown, soft housing markets significantly dampen agency MBS prepayment risk," Abrahams said, adding that most of the volatility due to the lingering threat of downgrade appears priced in to the secondary market. Meanwhile, Federal Reserve strategy appears unchanged in the wake of the debt standoff. The risk is that, in the event of a downgrade, government-sponsored enterprises Fannie Mae and Freddie Mac would be negatively impacted. Nonetheless, the Fed continues to allow its $897 billion in MBS to run off. Fannie Mae’s $732 billion portfolio and Freddie Mac’s $685 billion are winding down, too, Abrahams notes. "And the U.S. Treasury is slowly selling its $83 billion holdings," he said. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.