A Puzzle

Okay, here’s a question that I don’t know the answer to.  Why are current coupon Ginnie Mae MBS yielding roughly the same as Fannie Mae MBS?  THe Ginnie Maes are government guaranteed, so they should have a lower cost of funds.  Why isn’t the spread bigger?

I write this because there are many who think that folding Fannie and Freddie into the US Government could lower their funding costs, and lower mortgage rates. Well, Ginnie Mae is already there, and it does not seem to be making much difference. The Feds could have put the pedal to the metal with Ginnie Mae, but there does not seem to be much advantage, and I don’t know why.


  • gee whiz says:

    Government backstops aint what they used to be.

  • gaius marius says:

    i hesitate to offer this, but could it be that there’s just no capacity out there to arbitrage in scale sufficient to approximate efficiency? it seems all too possible given that the arbitrageurs were largely hedge funds (most of whom are liquidating to some extent) and foreign central banks (who have by brad setser’s measure moved to treasuries for the maximal guarantee — and who have not been particularly yield sensitive in any case).

  • James Cullen says:

    I guess this is more evidence of your post a few days back, where you said that odd happenings in the bond markets tend to occur in clusters.

    I couldn’t begin to explain what’s happening, but I will venture that people believe nationalizing Fannie/Freddie will lower funding costs because they don’t actually look at the data, since it’s so intuitively correct of a statement and thus easy to make…

  • matt says:

    Mr. Merkel:

    Could it have something to do with the TARP? Or are they just buying the toxic waste?

    Also, I wonder why you think there should be a spread between FNMA and GNMA notes when there is now an explicit guarantee of the Fannie and Freddie. It seems like the only spread should be a liquidity one.

  • matt, the guarantee is not well respected. Agencies trade wide of Treasuries by 1%+. Either they should be flat to Treasuries, or F&F should have a similar spread over GNMA.

    gaius, you might be right…