Fannie Mae Workout Likely to Lead to Lower Interest Rates

A good summary on this weekend’s government intervention concludes:

Last night’s announcement was unqualified good news for the US economy. It will eliminate a large source of financial uncertainty, reduce US mortgage rates, boost the availability of housing finance and strengthen the dollar by making absolutely explicit government guarantees on GSE debt.

And on the matter of falling interest rates, goes on to say:

The upshot is that GSE obligations will again be seen as almost identical to US Treasury bonds. The yield gap between GSE and Treasury bonds, about 0.9 percentage points, should narrow to its long-term average of 0.5 points and may well be squeezed all the way down to 0.2 points, where it used to trade in the mid-1990s.

This narrowing of spreads should in turn mean that interest rates charged to US mortgage borrowers should decline by a corresponding amount.

So this amounts to a prediction that interest rates will drop nearly three-quarters of a point.


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