The bond market has taken a significant beating in the wake of the Federal Reserve cutting interest rates to record lows. With the central bank unlikely to raise interest rates anytime soon, things do not look good for the once-booming sector. Proposed regulatory changes now threaten to compound woes in the ailing housing-bond market.
Housing Bond Market Uncertainty
The $50 billion housing -bond market is in jeopardy amid growing concerns about defaults on credit-risk transfer securities issued by Federal Home Loan Mortgage Corp (OTCMKTS: FMCC) and Federal National Mortgage Association (OTCMKTS: FNMA). The mortgage-backed securities can only pay investors interest and principal on borrowers not defaulting. However, that appears not to be the case, given the uncertainty in the economy, fuelled by high unemployment levels.
The fact that Fannie Mae is yet to issue any bonds since the pandemic started is already arousing concerns in the housing bond market. Likewise, reports that Fannie Mae managers are warning some investors behind the scenes about the markets long term viability continues to rattle sentiments in the once-booming sector.
The reduced activity in the housing bond market is getting investors worried that they will end up with securities that no one is willing to buy. The uncertainty has been exacerbated by the Federal Housing Finance Agency Director Mark Calabria proposals that many say will make it difficult for Fannie Mae and Freddie Mac to keep issuing securities. The plan, if implemented, will reduce capital relief that companies get on giving credit-risk transfers.
Regulatory Changes Impact
Fannie Mae and Freddie Mac don’t originate Mortgages. Instead, they buy them from lenders, convert them into securities, and then sell them while guaranteeing principal and interest repayment to investors. In return, Investors generate returns from credit-risk transfer securities on borrowers paying their mortgages.
The credit transfer bond market has ballooned to a market capitalization of about $45 billion. The market was expected to mature into a staple mortgage bond market. However, that is unlikely to happen on Calabria, proposing a reduction in the amount of capital that the mortgage giants can hold once they exit federal conservatorship.
A point of concern is that limited capital could force Fannie and Freddie to stop issuing new securities. If this were to happen, then it would be difficult for investors to trade the bonds they already own
Broadridge Financial Solutions Milestone
Amid the uncertainty in the credit transfer market, Broadridge Financial Solutions has confirmed integrating its artificial intelligence-driven digital platform LTX with the Charles River Investment Management Solution. The integration is part of a strategy that seeks to improve efficiency in the corporate bond market.
The integration will allow Charles River order and execution management system user’s to digitize their workflows, conversely improve liquidity and efficiency when dealing with illiquid corporate bonds. Traders will be able to route their orders to LTX via FIX connectivity and connect with dealers of their choice.
The LTX digital trading platform uses patent-pending AI and next-generation protocols to provide the buy-side and sell-side in bond trading.