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The FOMC Notes That Credit Conditions Are Improving Slightly

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Credit conditions ease, but mortgage credit is tight

In the FOMC’s March review of the financial situation, members discussed the state of the credit markets and the interbank market. The Fed gets rough data on Treasury trading from primary dealers through its Desk Survey.

Primary dealers trade Treasuries in the primary market. This means they trade directly with the Fed. This is a lucrative business, but it also means they sometimes must trade with the Fed even when they don’t want to.

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The FOMC noted that credit conditions have generally improved

The FOMC staff economists said that financial market conditions have improved further since the March meeting. Risk sentiment was improved as financial market volatility fell and commodity prices began to rebound. Foreign economic news have improved somewhat. However, economies are still weak on balance globally.

Financing conditions for investment-grade issuers remain good, and some of the more speculative-grade borrowers improved. Corporate bond issuance rebounded in March after a very slow start to the year. Credit tightened for commercial real estate transactions, and residential mortgages for people with credit problems, hard-to-document income, and so forth remained tight. The Senior Loan Officer Survey did mention, however, that originators had loosened credit for government-guaranteed mortgages. Consumer credit conditions were largely unchanged.

Implications for mortgage REITs

Tight credit conditions remain an issue for mortgage REITs. Originators such as Nationstar Mortgage Holdings (NSM) have to contend with lower volumes than they would like. They’re stuck with portfolio loans that can’t be put in jumbo MBS (mortgage-backed securities), Fannie Mae, or Ginnie Mae securitizations.

Agency MBS REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) seem to be getting the majority of the flow due to the concentration on MBS guaranteed by the US government. Non-agency REITs such as Two Harbors Investment (TWO) are finding the menu of investment opportunities limited.

Investors who are interested in trading in the financial sector can look at the S&P SPDR Financials ETF (XLF). Investors who want to bet on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).

In the final part of our series, we’ll see why the FOMC has decided to maintain its balance sheet at $4.5 trillion.

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