Last month, the Federal Housing Finance Agency and the Treasury Department put out a press release. It stoked speculation that government sponsored entities (GSEs) Fannie Mae and Freddie Mac could eventually face privatization. Those mortgage entities have essentially been wards of the state since the global financial crisis. News of their potential privation didn’t do much to stir the mortgage-backed securities (MBS) in either direction.
For example, the WisdomTree Mortgage Plus Bond Fund (MTGP ), an actively managed exchange traded fund dedicated to mortgage bonds, is flat year-to-date.
The mortgage-backed securities market’s lack of volatility and MTGP’s steadiness against the backdrop of Fannie/Freddie privatization talk could be positives. It indicates that these bonds don’t need the catalyst of the GSE privatization to deliver for income investors.
MTGP Not Reliant on GSE Catalyst
There’s no denying that the Treasury Department would benefit from privatizing Fannie and Freddie. By some estimates, Uncle Sam would wring $100 billion or more in profits from such a move. However, naysayers may be apt to note that $100 billion funds less than a week of government spending.
But — important for investors — mortgage bonds and MTGP don’t need Fannie and Freddie to be divested by the government to deliver steady income and peace of mind. That’s a good thing, because getting to privatization is a lengthy road, littered with complexities.
“Rushed attempts to capitalize on the US Treasury’s GSE ownership stakes to generate near-term, non-tax revenue could have far-reaching implications on bond markets and housing stability. Republicans only maintain a thin majority in the US Congress which will be a hurdle to making any legislative changes,” noted BNP Paribas.
MTGP Appeals to the Risk-Averse
Without GSE privatization, MTGP has alluring attributes. Those include a 30-day SEC yield of 3.83% and a credit-quality profile that can satisfy even the most demanding investors. The ETF’s effective duration of 5.32 years puts it in intermediate-term territory — the part of the curve often least correlated to stocks.
Those points confirm MTGP is a viable consideration for risk-averse income investors, with or without the catalyst of Fannie/Freddie privatization.
“In closing, while GSE reform is certainly a possibility in the future, our view is there is little to suggest any meaningful change happens in the near or medium term. This includes any impact to market function. The Agencies will continue to operate normally, facilitating the flow of credit to a highly efficient capital market,” concluded BNP Paribas.
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