Buzz and Banter
For those of you who were tracking the losses in the government bond market yesterday, I can guarantee on thing: FNM was tracking it much more closely. In fact as I described in a past article, they probably exacerbated it. Once bonds start going down, FNM and other Government Sponsored Enterprises, GSE's, have little choice but to sell in order to hedge their duration risk (short gamma). Remember, every time they sell low and buy high (they exacerbated the move up in bonds too) they lock in losses; they can only hope that these losses are smaller than their gains from the spreads they earn on mortgages.
This hope is wearing thin. We cannot know for sure, since FNM (especially) is non-communicative about much that goes on internally, but our best guess is that once the volatility of the government bond market goes higher than 11% or so, it completely eats into the profitability of these companies. Currently the volatility of this end of the bond market has been at the low end 10.5% and as high as 12%.
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