Big Boys Buying Mortgages In Reaction to Treasury Plan

Big Boy Investors like PIMCO, TCW, and Fifth Third Asset Management are buying mortgage backed securities and favoring them over treasuries.

A March 23 Ried, Thunberg & Co. survey said fund managers overseeing $1.19 trillion cut their government securities holdings to the least this year while they increased mortgage assets.

This is in reaction to the Federal Reserves March 18 plan to buy Treasuries and $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae.

So far the plan which is designed to lower consumer interest rates by taking supply out of the market seems to be working. A contrarian might ask? Is this front running or the makings of a trend that can be sustained over a long period of time?

Interest rate spreads are clearly narrowing across most quality preferences. The spread between the ten year Treasury and Fannie Mae’s current-coupon 30- year fixed-rate narrowed to 118 basis points last week, down from 232 basis points in November. The spread on industrial corporates narrowed from 557 basis points to 468 basis point since the announcement.

These narrowing in the interest rate spreads can also be seen as a vote of confidence for the recently announced Fed plan.

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