The Great Debate UK
By Agnes Crane and Antony Currie
Investors seem remarkably relaxed about the end of the U.S. Federal Reserve's $1.25 trillion program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac.
Just a few months ago many worried that, without the central bank's continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they're regarding the Fed's exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system.
Granted, there are reasons to explain investors' sanguine view, and timing has much to do with it. For starters, a lot of traditional buyers of these agency mortgage bonds have either stayed on the sidelines or bought far fewer bonds than their portfolio allotments allow. They, along with index funds, now account for 18 percent of the market, down from 25 percent before the Fed stepped in, according to Credit Suisse.
But many don't have too many other investment opportunities right now that match their stringent criteria, meaning they may move into any gap left by the Fed. Banks with cash to spare after boosting their capital levels are obvious potential buyers, too, as JPMorgan <JPM.N> boss Jamie Dimon pointed out at a conference last month.
Is the worst over for Spanish mortgage defaults? That’s one way to interpret Santander’s offer to buy back up to 16.5 billion euros of its outstanding asset-backed debt.
The securities are trading below par – more than 40 percent in some cases before today’s announcement - allowing the bank to reduce debt by buying them back. Cash-rich banks such as HSBC have launched similar buybacks this year to profit from the ABS market dislocation, but it's the first time a Spanish bank has launched such a large public buyback.