Thanks to the spread of the coronavirus, markets became unglued this week as stock prices plummeted. Meanwhile, Treasury yields fell while mortgage rates actually increased. Confused? Welcome to the club.
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Issuance of non-agency MBS and ABS is still being completed, but at a slower pace. Spreads have widened for new deals along with trading in the secondary market.
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Industry-wide holdings of residential MBS were steady in the fourth quarter, but several REITs shifted their focus to non-agency MBS and other investments. (Includes data chart.)
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Foreign investors boosted their holdings of U.S. agency MBS by 13.4% from June 2018 to the middle of last year, with big gains posted by Japan and China. (Includes data chart.)
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Since the financial crisis, the Fed’s main policy tool has been to lower interest rates by purchasing Treasuries and agency MBS. However, with rates on these securities at record lows, this strategy may no longer work.
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Coronavirus-related risks for certain industries represent a significant danger to the U.S. collateralized loan obligations market, but diversification and liquidity buffers may help absorb the immediate impact.
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A longer statute of limitation and increased disclosure requirements could help attract long-term investors in the MBS and ABS market, industry experts recommend.
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