Bloomberg News

Fed in Banks’ Wheelhouse May Fuel Bond Shift, Deutsche Bank Says

September 28, 2011

Sept. 28 (Bloomberg) -- The Federal Reserve’s decision to resume purchases of government-backed mortgage securities may help push banks to expand the types of bonds they buy, according to Deutsche Bank AG.

U.S. commercial banks’ holdings of home-loan bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae have swelled $104 billion this year to a record $1.21 trillion, according to Fed data. Their total amount of securities climbed $58 billion to $2.48 trillion amid sluggish bank lending.

Banks are considering investments outside their traditional “wheelhouse” of agency mortgage bonds, including securities backed by commercial mortgages, subprime auto debt and company loans, Deutsche Bank analyst Steven Abrahams wrote today in a report, citing meetings he’s had with lenders in the past week. By lowering mortgage-bond yields, the Fed’s plan to reinvest proceeds from the $1 trillion of housing debt it holds into new home-loan securities may fuel buying of riskier debt with higher yields, he wrote.

“It’s hard to say that there’s some huge ‘student body left’ movement to suddenly jump into credit risk, but there’s certainly more anecdotal evidence it’s happening,” Abrahams, Deutsche Bank’s New York-based securitization-research head, said in a telephone interview, using a college football term.

Abrahams noted Fed policy makers had been signaling they wanted to rid the central bank’s balance sheet of its unconventional mortgage-bond holdings as quickly as possible. He also joins analysts at Credit Suisse Group AG and CRT Capital Group LLC in saying the Fed may have decided to switch tactics to push banks to lend. The central bank disclosed the plan on Sept. 21.

Weak Demand

Weak demand among borrowers for loans may restrain growth, Abrahams said. Loans and leases owned by banks have gained $41.8 billion this year to $6.8 trillion, driven by increases in commercial and industrial holdings, according to Fed data as of Sept. 14.

Yields on traditional types of bank investments in the agency mortgage-bond market have fallen to about 2 percent for some debt and less than 1 percent for shorter-duration securities, amid the Fed’s policies, Europe’s debt crisis and the U.S.’s sluggish economy, according to the Deutsche Bank report.

The bonds include new 15-year pass-through securities and short-duration classes of collateralized mortgage obligations.

Banks of all sizes may buy other types of securities, though the largest banks would find it more difficult to acquire blocks of debt large enough relative to their sizes, he said.

-- Editors: Pierre Paulden, Alan Goldstein

To contact the reporter on this story: Jody Shenn in New York at

To contact the editor responsible for this story: Alan Goldstein at

Toyota's Hydrogen Man
blog comments powered by Disqus