A research note by Citi analysts Rohit Thapliyal, Haein Choi and Robert Rowe examines the impact of GSE related headlines on agency debt, MBS, preferred stock and equity markets during the course of the past five years and across three phases.
Agency preferred stock: Headline sensitivity
It is clear from the above charts that agency debt shows low volatility across the three phases of crisis response, stabilization and recovery.
However, agency MBS can be observed to be more sensitive to headlines, compared to debt, as it reacted to headlines from the Fed relating to QE, and to GSE headlines, primarily on housing reform.
The most sensitive to news developments are the preferred stock and equity shares, and particularly so after the third amendment to the Preferred Stock Purchase Agreement (PSPA) in August 2012.
Methodology
Headline impact is quantified by Citi by observing the change in spread and percentage change in the price within a week of the event and converting that move into the number of standard deviations it represents.
Observations – Phase 1 – Crisis response (9/08- 7/10):
During this period Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) were put into conservatorship and received support from the FHFA, the Treasury and the Fed.
Spreads tightened for Agency debt and MBS.
Due to delisting, preferred stock and common stock ruled at close to zero levels.
Phase 2 – Stabilization (8/2010 – 8/12)
This period was marked by reduced losses at the GSE’s following Fed actions and an economy on the mend. Near its end, the GSEs became profitable and were subject to the 3rd PSPA amendment that appropriated all their profits to the Treasury.
Agency and MBS spreads remained stable, but signs of increasing volatility appeared in the preferred stocks.
Phase 3 – Recovery – (9/12 – current)
The recovery in the housing market ensured solid profits for the GSEs, which have repaid all of the bailout funds received from the Treasury. The taper threat in mid-2013 caused turmoil in the agency and MBS markets.
During this period various political statutes such as the Jumpstart GSE Reform Act, PATH Act and the Corker-Warner Bill, as well as a suit by Perry Capital impacted the MBS, preferred and common stocks.
Outlook
“The prospects for preferred stocks and common shareholders reside with the courts and with legislators drafting GSE reform proposals,” says the report. “We therefore expect this heightened level of sensitivity to continue.”
However, some of the “immediacy” of housing reform may be blunted by the return to profitability of the GSEs, and legislative actions may be constrained in the midst of an election year.
