U.S. Agency Land: Are they tapped out?
Wednesday, May 21, 2014
Amidst all of the recent headlines ranging from the situation in Ukraine to the Great Lime Shortage, one situation many investors might not be aware of is the steady decline in U.S. Agency debt issuance. Over the past three years, the debt offered by Government Sponsored Enterprises (GSE’s) has declined to levels not seen since the late 1990’s. This drop can be partially attributed to the conservatorship restrictions placed on Fannie Mae and Freddie Mac to reduce their overall portfolio size, but those two combined are only slightly larger than the Federal Home Loan Bank (FHLB) by amount of issuance.
Using data compiled by the Securities and Financial Markets Association (SIFMA), agency issuance has averaged $826 billion per year for the past 10 years. This past year just $396 billion of GSE agency, non-MBS debt was issued. This figure is less than half of the 10 year average and a full two-thirds less than the high of $1.2 billion in 2010, as illustrated in the graph below.
To find the last time U.S. Agency debt issuance was below $400 billion, you’d have to go back to 1997 where issuance totaled $323 billion. This trend in issuance follows into the GSE’s short term market where products such as money market mutual funds feel the pinch as well.
As one of the least volatile fixed income asset classes, U.S. Agency debt is frequently used as a source of collateral. As the level of issuance decreases and subsequent level of debt outstanding follows, investors could use more volatile types of collateral such as Mortgage backed securities.
The start of 2014 has seen a continuation as the first four months experienced a 29.6% drop compared to the same period in 2013. This trend is expected to continue as Fannie Mae and Freddie Mac wind down and the needs for new issuance in the GSE’s remain muted.
*Source: Securities and Financial Market Association (SIFMA)