Mortgage bonds have been hit in recent weeks by the regional bank crisis, and the Federal Reserve has the potential to add to pressure on the securities on Wednesday.
Excess returns on the bonds, which compares mortgage backed security performance to Treasuries, are -0.94% for March, on track for the worst relative performance since September. Regional lenders including the failed Silicon Valley Bank are widely expected to sell at least some of their holdings to boost their liquidity, which has weighed on the bonds.
On top of that, it's
The U.S. Federal Deposit Insurance Corp. is
But even if its portfolio is absorbed into a different bank, any acquirer will be less interested in buying the securities in the future because of its growing holdings, said Erica Adelberg, MBS strategist at Bloomberg Intelligence, in an interview. Either way, future demand for the bonds will suffer.
"If the portfolio is liquidated or sold to another buyer at a discount, the MBS market will have to absorb the pain of more supply and fewer buyers," said Adelberg.
Silicon Valley Bank had around $58 billion of mortgage bonds in a book of securities classified as held-to-maturity as of Dec. 31, about equal to the total supply of new securities in the market February, so its holdings are substantial relative to existing demand, Adelberg said.
The mortgage bond market had already been facing pressure on demand for the securities. The Federal Reserve, until recently the biggest buyer of mortgage bonds, has effectively stopped purchasing them while banks, another key holder of the bonds, have also
After the SVB collapse, many banks
With low or no demand from the Fed and banks, there's only one marginal buyer to snatch up the debt: Money managers. They came in late last year for the
But it's not clear when they will resume buying. Some investors are hopeful that they'll step in soon, after spreads on the securities widened by around 0.4 percentage point since early February by one measure, bringing them to their widest since November.
"The agency MBS market is extremely volatile and there's a lot of uncertainty stemming from the recent banking crisis and related supply concerns," said David Goodson, head of securitized credit at Voya Investment Management, in a phone interview. "Despite all the worry, the sector has widened a fair amount and one could argue there is potential for upside."