Thanks to the spread of the coronavirus, markets became unglued this week as stock prices plummeted. Meanwhile, Treasury yields fell while mortgage rates actually increased. Confused? Welcome to the club.
Issuance of non-agency MBS and ABS is still being completed, but at a slower pace. Spreads have widened for new deals along with trading in the secondary market.
Since the financial crisis, the Fed’s main policy tool has been to lower interest rates by purchasing Treasuries and agency MBS. However, with rates on these securities at record lows, this strategy may no longer work.
Coronavirus-related risks for certain industries represent a significant danger to the U.S. collateralized loan obligations market, but diversification and liquidity buffers may help absorb the immediate impact.
A longer statute of limitation and increased disclosure requirements could help attract long-term investors in the MBS and ABS market, industry experts recommend.
If the non-agency MBS market wants to avoid harsh regulations, it should seriously consider self-governance as an option, the Structured Finance Association believes.
Rates have fallen to historic lows, with MBS values rising. However, as the weekend approached uncertainty prevailed. The wild card: prepayment speeds.
The SEC’s Office of Credit Ratings is exploring how it can address conflicts of interest in ratings of MBS and ABS. An increase in performance-related disclosures and boosting unsolicited ratings are being considered.
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