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These days, some bond market investors - often known for their laconic sense of humor - are trading an email graphic of a deer frozen in the beams of a car's headlights. They'll tell you the graphic could be a portrait of a market in which many investors are refraining from doing much with their holdings of Fannie Mae and Freddie Mac mortgage securities.
Fannie and Freddie sell guarantees to mortgage lenders that ensure home loan payments each month are timely. The guarantees then allow lenders to resell their mortgages into securities which are seen as some of the safest investments on Wall Street because of the housing agency guarantee. Wall Street firms play a key role in the repackaging of securities into bonds - they sell the bonds to a wide range of investors and make markets in the securities.
But the spread, or yield premium, for Fannie and Freddie mortgage bonds has gapped out amid a massive drop in demand from a broad range of investors. "It feels terrible," says Bill Chepolis, portfolio manager at Deutsche Asset Management, where he manages an $8 billion portfolio. Recalling the 1998 credit crisis involving Long-Term Capital Management, Chepolis says "I remember it happening quicker, not being as drawn out. Now, each day gets worse and worse."
The concerns about late payments and defaults lingered over the subprime market early this year, into the summer and now into the fall season. Spreads for these mortgages to less-credit-worthy consumers have widened dramatically and the ability to readily sell these securities has been hobbled by concerns about the home loans packaged in these bonds.
At the same time, spreads of Fannie and Freddie securities have also widened...