Fannie Mae, Freddie Mac place large bids for mortgage-backed securities

[NEW YORK] Fannie Mae and Freddie Mac have begun placing sizeable orders to purchase mortgage-backed securities, stepping into a market roiled by widening bond spreads and a surge in volatility, according to a source with direct knowledge of the matter.

The government-controlled entities are moving to capitalise on a sharp sell-off while expanding their already significant portfolios of bonds and loans, said the source, who asked not to be identified discussing confidential information.

Their efforts follow a directive two months ago from US President Donald Trump, instructing the companies to acquire US$200 billion of mortgage-backed securities as part of a push to drive down mortgage rates and bolster housing affordability.

The increased buying could help cushion a spike triggered by the ongoing Iran war that has sent those rates to a three-month high. Still, it may only partially offset the broader market pressures stemming from the conflict, punctuated by a marked jump in Treasury yields on Friday (Mar 20).

Representatives for Fannie Mae, Freddie Mac and the Federal Housing Finance Agency, which oversees both companies, did not respond to multiple requests for comment.

Fannie Mae and Freddie Mac, which purchase and package home loans into securities and financially guarantee them to buyers, rank among the largest holders of US mortgage debt via their so-called retained portfolios, the bonds and loans they hold onto rather than sell to investors.

The pair, under federal conservatorship since 2008, once held a combined US$1.5 trillion worth, but by late 2022 that figure had dropped to just US$158 billion.

Since the middle of last year, the portfolios have been on the rise again, climbing to US$278 billion as at January, according to the most recent data available.

Trump’s directive for Fannie and Freddie to ramp up bond and loan purchases sparked an almost immediate move in the roughly US$9 trillion mortgage-backed securities market, with relative yields to Treasuries on recently issued securities narrowing about 0.2 percentage point.

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In the weeks that followed, however, the pair bought at only a modest pace. That likely reflected already compressed risk premiums on many mortgage bonds, which left limited profit potential and reduced scope to meaningfully influence mortgage rates.

Mortgage-bond spreads have widened sharply since then, as a pickup in interest-rate volatility, driven in part by swings in oil prices amid the escalating conflict in the Middle East, ripples through fixed-income markets. BLOOMBERG