Mortgage bonds supported by government-backed companies like Fannie Mae and Freddie Mac were trading slightly wider Monday morning after Moody’s Ratings downgraded the US late last week.
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Risk premiums on recently produced 30-year mortgage bonds guaranteed by Fannie Mae rose to roughly 1.54 percentage points above a blend of Treasuries as of 11:20 a.m. in New York, according to data compiled by Bloomberg, compared to 1.49 percentage points on Friday.
The downgrade of the US puts the spotlight on the nation’s support of Fannie Mae and Freddie Mac, which guarantee most agency bonds. Other agency mortgage bonds are guaranteed by Ginnie Mae, which is wholly owned by the US government. Investors could be inclined to sell the securities if they expected the US government to be unable to make good on its guarantee.
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The securities tend to perform worse when the future direction of interest rates becomes less certain, as was the case following the Moody’s downgrade. Yields on 10-year Treasuries, which are a baseline for the cost of mortgages, were higher on Monday.
The overall impact on the $9 trillion market for agency mortgage bonds has been minimal. The debt doesn’t receive credit ratings, and no single group of mortgage-backed securities owners is overly sensitive to small changes in the nation’s ratings, especially after the two other large ratings companies had already moved to lower the US rating, investors told Bloomberg over the weekend.
