One benefactor of concern over a treasuries bubble has been the market in agencies debt. Last month, for instance, investments in agencies returned 1.55 percentage points more than treasuries, according to Barclays.
While agencies, the debt issued by the US’s government-sponsored enterprises (GSEs), have obviously benefitted from the Fed’s programme of buying up GSE debt and MBS, there are other factors driving demand. From Deutsche Bank’s US fixed income weekly:
The overall increase in risk appetite for spread product has been critical, and this has been partly fueled by expectations of Treasury underperformance in light of enormous Treasury supply. ..
Government-only funds are not necessarily buying FDIC-backed bank debt. This has created an environment in which Agencies are not only a Treasury substitute, but for some investors, also a substitute for TLGP bonds. Agencies of course do not have the explicit backing of the Government. Yet the $3 trillion size and the importance of the GSE’s within the fabric of the current financial system renders Agency bonds in some ways closer to Treasuries than FDIC-backed bonds, which is reflected in relative spread levels.
TLGP bonds — though backed by the Federal Deposit Insurance Corporation, are still not as easy for investors as straight-out treasuries or agencies –they have a few operational quirks. For example, claims on the debt in the event of default, though protected by the US government, still have to follow a defined procedure within a specified timeframe. If the claims aren’t done properly, payments may not be made. There’s also language in the TLGP prospectus that suggests they could be delayed. And so, agencies are going strong.
But there’s a caveat, from DB, regarding agencies supply:
Agency supply is off to a strong start this year, and if the pace persists it could keep pressure on spreads even as the Fed purchases continue. Freddie and Fannie have already issued $12.5bn in benchmark and reference bullets. At $39bn, Freddie’s gross issuance in the first four business days of the year (if prorated) outpaces any month in the last nine years.
Fannie and Freddie, we should note, have something like an $850bn cap on their portfolios this year under the terms of their conservatorship (though that could change under Obama’s administration). That still leaves room for about a whopping $111bn in issuance, according to DB.
Related links:
Coping with failure, redux - FT Alphaville
Tide turning for US treasuries - FT Alphaville
Fannie Mae, Freddie Mac bill sale calendar - Reuters
