- On Sunday, 7 September, the
US Treasury announced further steps to overcome the problems with the two large
mortgage lenders, Fannie Mae and Freddie Mac. The Government is effectively
taking over control of the two agencies under so-called conservatorship of the
Federal Housing and Finance Administration.
- The Treasury.s plan also includes securing the solvency of the agencies through injecting capital by issued senior preferred equity shares, securing the liquidity of the agencies and the Federal Home Loan bank by introducing a new credit facility, and finally securing the liquidity of the market by issuing a temporary programme to buy GSE MBS.
- The plan is expected to trigger relief in the market in the next few days; the pattern set by the 13 July statement suggests we should see some return of risk appetite. We have already seen strong equity performance in Asian markets and a sharp rise in US bond yields. Also expect a tighter US agency spread, and tighter swap spreads.
- Whether the Treasury.s move is sufficient to
more lastingly break the negative dynamics in the finan-cial markets remains to
be seen. This is the boldest move so far in the crisis and makes it clear that
the US Government is willing to go to great lengths to prevent systemic risks
from evolving too far. However, plenty of troubles are still out there and with
US house prices still falling, it is too early to make any firm conclusions on
the lasting impact of this intervention. The growth outlook for the rest of the
year is still very shaky and we expect bond yields to revert lower again when
the dust settles from the relief in the markets.
- Given the scope of the Treasury.s actions, we think the plan will be able to bring mortgage rates lower. This would be a key achievement in ultimately promoting some stabilisation in the housing market.
