A recurring rumor surfaced again last week after a senior Federal Reserve official reiterated the possibility that the Fed is looking into adding Ginnie Maes to its own account, the System Open Market Account (SOMA). Ginnie MBS strengthened on the news, relative to Fannie Mae and Freddie Mac mortgage-backed bonds, said MBS analysts.

This is the first time that the topic was broached openly since last summer, when the Fed announced that it was studying the possibility of using GNMAs in the Fed's SOMA as a substitute for Treasurys.

But last Tuesday, Dino Kos, manager of the Fed's SOMA, gave a positive push to Ginnies in a speech given to the Money Marketeers of New York University, which is a club of economists.

"At the risk of disappointing tonight's audience, I must say that I have no final announcements on what alternative assets the Fed is prepared to buy and hold, which would meet our needs," said Kos. "However, I will note that repos in municipal securities do not appear to be a viable alternative, while repos in foreign sovereign debt and outright purchases of GNMAs show somewhat more promise."

GNMAs outperformed following the speech, and their advantage was furthered by the fact that Fannie and Freddie have recently been the victims of bad press: There was some indication recently that the Bush administration may have concerns about how large the two agencies have grown in recent times. Though not specifically mentioning either Fannie or Freddie in the same sentence, the president's new budget said that the large size of some government-sponsored enterprises may present a "potential problem."

Because of this somewhat critical comment, Ginnies strengthened a couple of ticks relative to Fannie and Freddie, said Art Frank, director of mortgage research at Nomura Securities. Frank also stated last Thursday that the indication that the Fed is still looking into adding GNMAs to its portfolio caused Ginnies to significantly outperform.

Separately, National Mortgage News, owned by the same parent as ASR, reported that on page 180 of the president's budget for fiscal year 2003, the administration stated, "Financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity."

The administration also noted that the two agencies control 63% of the origination market and have met or exceeded their affordable housing goals. However, the administration softened the above statements by saying, "By the most recent estimate available, the conventional market's loans to low- and moderate-income families and families in undeserved areas exceed the purchases of such mortgages made by Fannie Mae and Freddie Mac."

It's no biggie

Despite Kos' speech, some MBS analysts have dismissed the recent Fed statements on GNMAs as mere repetitions of what was said before.

This story does not ring true, especially now that the U.S. seems to be heading towards a deficit, according to some MBS analysts.

"It looks like we are going to be running into a deficit, not a surplus," said one MBS strategist. "Last year, Ginnies became rich because people thought there is not going to be any Treasury debt. So the only way to substitute for Treasurys is for full faith and credit - which are Ginnie Maes - and you would have a bunch of foreign central banks coming in and buying it. That kind of story is much weaker now because we are running a deficit, so it doesn't look like Treasurys are going to go away."

Other analysts said that the move to buy GNMAs would only make sense if it were an official government policy to get Federal Housing Administration rates down.

The effect of

anti-GSE sentiment

Though Fannie and Freddie have been criticized in the media, this should not really be a factor in recent Ginnie Mae outperformance in the long run relative to the two agencies, sources say.

Analysts said that fundamentally, the issue should have no impact on Ginnie/Freddie swaps; it would probably have more of an impact on Agency debt rather than substantially affecting how mortgages perform.

However, anti-GSE sentiment may have the effect of slowing agency growth; however, this is not necessarily bad for mortgages.

"There may be a little headline risk here and there, but it's not really a serious concern," said the MBS strategist.

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