As the US housing market boomed in the past decade and fuelled a bull market in mortgage investments, Norway’s government-owned investment fund went along for the ride, and the fall.
After the fund recorded its worst-ever year in 2008, managers blamed investments backed by US mortgages as a key culprit and began to cut back.
Now, US officials are looking to foreign government funds again.
The Federal Reserve is scheduled at the end of March to halt its purchases of mortgage-backed securities, a move that could drive up the low interest rates that have helped the housing market show new signs of life.
The Fed is gambling that private investors will step in to buy the securities, helping to keep rates from spiking. Senior officials in the Obama administration and at the Fed say they are counting in part on foreigners to keep the housing market funded.
But financial analysts and advisers familiar with foreign government funds, known as sovereign wealth funds, predicted that the United States will get limited relief from abroad.
‘I don’t think it will be enough to fill the hole,’ said Ajay Rajadhyaksha, head of fixed-income strategy for the United States at Barclays Capital.
Nor is Norway’s experience encouraging. Its government’s holdings of securities issued by the mortgage financier Fannie Mae declined from a 2007 high of more than US$15 billion, at current exchange rates, to just more than US$5 billion as of Sept 30, 2009, according to the fund’s public reports.
Contracts with external investment mangers were slashed, and the fund’s guidelines were refocused toward individual stocks, real estate and other deals that the fund’s staff had the expertise to vet.
The largest sovereign wealth funds belong to big exporters such as China and the oil-rich monarchies of the Persian Gulf that accumulate trade surpluses.
These funds often set guidelines for the amount of money they are willing to put into bonds or other fixed-income investments, including mortgage-backed securities. Even if interest rates begin a modest rise, as he expects, Mr Rajadhyaksha said he does not think it will be enough for sovereign wealth funds to direct large amounts of money away from alternatives, particularly US Treasury notes, that are less risky and not associated with the mortgage crisis.
‘A lot of sovereign wealth funds have a vested interest in seeing the US stabilise,’ said RP Eddy, whose Ergo consulting firm advises foreign funds on US and global economic issues. ‘But some wealth fund coming in to save the day? That is not going to happen.’
The securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac are not debts of the US government, but do carry an implicit guarantee that the companies not be allowed to default. In December, the government carried that a step further, saying it would not limit the amount of money made available to keep the firms solvent.
Senior US officials said the goal was to reassure buyers of the companies’ mortgage securities that they were safe. ‘That’s particularly true for foreign investors,’ said Eric Rosengren, president of the Federal Reserve Bank of Boston.
The Fed’s departure from the market for mortgage-backed securities is only one step being taken to wind down the emergency measures put in place by the US government during the financial crisis. But it is one that could have a direct effect on homeowners and potential buyers and on the tentative recovery in the real estate market.
By packaging home mortgages into large bundles that are then sold to investors, Fannie Mae and Freddie Mac generate funds that allow banks and other lenders to provide more loans. Keeping that market liquid during the depths of the global credit crisis was a high priority – much so, that the Federal Reserve is expected to own US$1.25 trillion in mortgage-backed securities by the time the program ends.
If funding evaporates in the absence of federal support, that would mean higher interest rates – making purchases more difficult for buyers and payments more expensive for those with adjustable-rate loans.
Some financial analysts said US officials consider a healthy housing market so vital to an economic recovery that they would roll out new policies to keep mortgage rates low if sovereign wealth funds and other private investors fail to step in with enough funding.
Source: Business Times, 17 Feb 2010
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