Lawler: Update on GSEs

Key Takeaways

• Feb MBS holdings rose $11.3B, below expectations
• President pledged $200B GSE MBS purchases in January
• Low spreads made additional MBS buying uneconomic
• GSEs trimmed corporate and liquidity portfolios in February
• Interest‑rate sensitivity rose sharply, especially for Freddie

Summary

Fannie Mae and Freddie Mac increased agency MBS holdings by about $11.3 billion in February, the smallest rise since September 2025 and well below the $15.5 billion jump in January. The increase falls short of the White House’s January pledge for the GSEs to buy $200 billion of MBS. Low MBS‑Treasury spreads and weak risk‑adjusted returns discouraged further purchases, even as political pressure mounted. Meanwhile, both GSEs trimmed corporate and liquidity portfolios, while Freddie’s interest‑rate sensitivity surged due to longer‑duration holdings.

Pulse Analysis

The White House’s January 9 announcement that Fannie Mae and Freddie Mac would collectively purchase $200 billion of agency mortgage‑backed securities set high expectations for a rapid acceleration in GSE buying. Historically, the GSEs have acted as a stabilizing force in the secondary mortgage market, providing liquidity when private investors retreat. By promising such a sizable commitment, policymakers aimed to reinforce confidence in the housing finance system and support the Federal Reserve’s broader monetary stance. However, February’s modest $11.3 billion increase—well under the prior month’s $15.5 billion—highlights a gap between political rhetoric and operational reality.

Underlying market dynamics explain the GSEs’ restraint. During the reporting period, MBS‑Treasury and MBS‑Agency spreads compressed to historically low levels, eroding the risk‑adjusted return on new purchases. For GSEs, which must meet capital and profitability standards, buying at near‑zero or negative spreads would diminish earnings and could trigger regulatory scrutiny. Even with political pressure from the FHFA head, the economics simply did not justify a large‑scale buying spree. Bloomberg’s report of “sizable” orders remains unverified, and the lack of observable spread tightening suggests any commitments have yet to translate into market‑impactful transactions.

The balance‑sheet implications are equally noteworthy. Both Fannie and Freddie reduced their corporate operating and liquidity holdings, signaling a shift toward a leaner asset mix. Freddie’s sensitivity to a 50‑basis‑point rate shock jumped to $1.289 billion, driven by a dramatic extension of its corporate portfolio duration to 36 months. This heightened interest‑rate risk could affect earnings volatility as Treasury yields rise. For investors and policymakers, the data underscore that GSEs will continue to weigh profitability against policy goals, and that future support for the agency‑MBS market may depend more on market conditions than on presidential pronouncements.