Government-owned mortgage finance giants Fannie Mae and Freddie Mac might be out of favor with the public, but the banks still love them. In fact, they are accelerating their purchases of the mortgage-backed securities issued by the firm ("agency MBS"). This might seem counterintuitive, considering that the housing market is still struggling. It shouldn't.
Jody Shenn of Bloomberg reports:
Commercial banks' holdings of mortgage bonds guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae climbed to a record $1.16 trillion in the week ended May 4, a rise of $42.7 billion since March 30 and $57.1 billion from year-end, according to Federal Reserve data. Yields on benchmark 10-year Treasuries have shrunk to 3.14 percent from this year's high of 3.74 percent on Feb. 8.
There are least five reasons why banks might be fleeing to agency MBS:
A Safe Haven for Cash
As the economy remains relatively slow, there isn't that much demand for loans from high quality borrowers. As a result, banks have a lot of cash that they don't want to just sit stagnant. They could invest it in equities or other higher-yielding opportunities, but they might worry about the uncertainty that lies ahead for the economy. As a result, they want a way for the cash to grow, without being too exposed to risk. Agency MBS provides a safe haven.