With the Federal Reserve raising short-term interest rates by 50 basis points and Congressional testimony by the heads of Fannie Mae and Freddie Mac, a devastating blow to the mortgage market could have occurred this week. The market seemed to ignore the information, however, and behaved as it has over the past few weeks.

"The Gensler-Baker genie hasn't been totally put back in its bottle, but about half of that political risk has gone away," said Art Frank head of mortgage-backed securities research at Nomura Securities.

He noted that a week ago, the 10-year benchmark yield was about 11 basis points wider than swaps, with it widening out to 20 over during the testimony and came back in to about 15 over by market close Thursday.

The shocker of the week, though was the surprising performance of Ginnie Mae securities. Despite the fact that the House Capital Markets Subcommittee gave hints that it might be backing off (see story, page 1), Ginnie Maes continued to outperform conventionals.

"It's actually impressive that the Ginnie Mae market has continued to do much better despite Baker kind of soft peddling on the whole issue," said Michael Hoeh, an MBS portfolio manager at Dreyfus Corp. "But it's clear some very large institutions are buying Ginnies, are favoring Ginnies."

Ginnie Mae 8s were trading 25 basis points wider than conventionals, and Frank said that is too rich, "given the better feeling in the debenture market about the credit quality of Fannie and Freddie. And really in coupon 6s through 8s, all the Ginnies look too rich to us, so we suggest some people do some swapping into conventionals."

Frank also believes that the bill will be put on hold, after observing that there is not much support for it in the subcommittee. "Not only were almost all the Democrats Fannie/Freddie defenders, but [Baker] had some defections in his own party. And I think that when you have other congressman who are GSE critics complaining about how many letters they got, in their view, generated by Fannie Mae, I think that's a sign the GSEs did a pretty good job of rousing their political support."

Frank added that Fannie Mae chairman Franklin Raines' written testimony was "masterful piece of research" and it provided "intellectual ammunition for the pro-GSE side."

Fed Goes Higher

The market basically ignored the Fed's rate increase because it had been built into the market. But it didn't stop the after effects. Mortgage rates are at a five-year high and purchase activity is starting to slow.

"We obviously seen the purchase activity starting to slow down and some discount prepays, and that was somewhat to be expected," said Hoeh.

"The Fed was almost totally anticipated," Frank added. "Had they done 25, they would have surprised the market. Fifty by the time the Fed acted had seemed to be the market consensus."

Low Flow in CMBS

In anticipation of the Fed's announcement, commercial mortgage-backed issuance flow was almost non-existent, with the exception of a triple-B bid list that came out Wednesday. As the summer approaches, the flow looks as if it is about to increase.

The triple-B piece traded really well, according to Hoeh. "Considering the last couple of new deals, the triple-B, triple-B lines did not go well at all," he said.

Next on hand is a triple crown CMBS offered by RFC, PNC and CIBC. It's set to price June 5, and the three companies have not given many details about it. "Logic has with three different originators, it tends to create some resemblance of a CMBS soup, rather than having a distinct consistency for the origination process," Hoeh said about the deal.

Salomon Smith Barney has three deals coming out in the coming months, and Morgan Stanley will be doing a deal for RFC.

The Lehman Brothers-UBS Warburg deal that priced last week did not trade well in the secondary market, Hoeh said.

Overall, triple-A pieces are trading very well, with five- and 10-year pieces trading one to two basis points tighter to swaps.

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