Mortgage bonds present new risks
Investors seem remarkably relaxed about the end on Wednesday of the Federal Reserve’s $1.25trn program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac. Just a few months ago, many worried that, without the central bank’s continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they are regarding the Fed’s exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system. Granted, there are reasons to explain investors’ sanguine view, and timing has much to do with it. For starters, a lot of traditional buyers of these agency mortgage bonds have either stayed on the sidelines or bought far fewer bonds than their portfolio allotments allow. They, along with index funds, now account for 18% of the market, down from 25% before the Fed stepped in, according to Credit Suisse.