Investors Look to Fannie, Freddie CRT in 2018

As reported by Bloomberg, subordinate tranches of agency Credit Risk Transfer (CRT) were high performers in 2017, with both Fannie Mae and Freddie Mac bonds earning more than 10 percent returns, compared with 7.2 percent returns on U.S. high-yield bonds and 5.9 percent for investment-grade corporate securities. Through 3Q17, there was more than $40 billion outstanding in CRT, and despite a momentary sell-off during hurricane season, the bonds have since recovered. The article notes that perhaps the strongest evidence for solid performance going forward is strong macroeconomic fundamentals, with unemployment hovering at 4 percent and annualized U.S. economic growth north of 3 percent.

Expectations are for Fannie and Freddie to sell an additional $13 billion in CRT for 2018. Increasing the bonds' attractiveness are changes that the GSEs have undertaken to the structure of the securities to make them more attractive to REITs. These changes are designed to allow CRTs to count under REIT rules as qualified REIT assets, which may increase demand.

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