Market Comment
Mortgage bond prices rose last week driving mortgage rates lower. The Treasury sold 104B in bonds, which were well received by foreign central banks. The indirect bidder participation, an indication of foreign demand, was near all-time highs.

For the week, interest rates fell by over a full discount point.

The employment report Thursday will be the most important release this week. The ADP employment report will also give a glimpse into the employment situation, though the two reports are derived from different data so there could be some divergence. Strength in other economic data will not affect mortgage rates.

GSEs
Government sponsored enterprises (GSEs) are financial services created by Congress. Two of the most important GSEs in the mortgage industry are Fannie Mae and Freddie Mac. These corporations were designed to make credit available to targeted borrowers in an efficient manor. Fannie and Freddie were completely privately owned. However actions by the Treasury and Congress within the last year now blur the ownership. The credit crisis left Fannie and Freddie with huge liquidity concerns. Drastic measures were taken to prevent total failure. The Treasury placed the GSEs in conservator, increased the lines of credit to the GSEs, and infused both companies with $100 billion for an ownership stake of 79.9%. This US Government ownership of these companies leaves many unknowns. While conservatorship implies temporary control, the Treasury exit strategy has yet to be revealed.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie traditionally differ. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time. In terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis.

Related Articles: Credit, Rates, Treasury, Unemployment