There has been a significant rally in US callable mortgage bonds before Easter given speculations that the Federal Reserve would in the end buy mortgage bonds in order to restore investor confidence. Furthermore, the two GSEs, Fannie Mae and Freddie Mac together with the regulator OFHEO reached an agreement on 19 March that the GSEs would provide mortgages amounting to up to USD 200bn in order to help US homeowners.
The Financial Times reported last week that there have been discussions between the Federal Reserve, BoE and ECB whether to buy mortgage bonds in order to support the mortgage markets in the US, the UK and Euroland. However, both US and Euroland officials are against such a move.
These events have led to a significant rally in US mortgage bonds with OAS on the on-the-run callable mortgage bond tightening significantly last week. USD swap spreads have tightened, while the implied volatility of the long end of USD swaption market has not risen significantly. Furthermore, the stock price of both Freddie and Fannie rose some 55-60% last week.
So what are the implications for Danish callable mortgage bonds that have also been under some pressure the past two weeks with OAS widening 10-12bp last week in the 4% and 5% 30Y callables? In the long run it should be positive for Danish mortgages that the Federal Reserve is trying to solve the crisis in the US mortgage sector. Swap spreads in Euroland have also begun to tighten although the ECB is not about to cut rates, so short term we would expect to see a tightening of the OAS.