00:00Smriti Papano, co-CEO and president of Dynex Capital, a real estate investment trust.
00:04Smriti, great to see you this morning.
00:06Glad to be here.
00:07And just to build Dudley's point, this idea that the way markets reacted means that the
00:10Fed has more work to do.
00:12The Fed hikes rates, and you see at least the 10-year rise high there.
00:15The 30-year doesn't do a whole heck of a lot.
00:17There had been hoped that maybe by doing this, they could actually bring long-term yields
00:20in.
00:21What does that tell you about the movers for here and that interplay between what the Fed
00:25does and how long-term rates react?
00:27Yeah, typically the Fed sets the Fed funds rate.
00:31And the back end of the yield curve is really driven by a host of other phenomena.
00:36So when you see a 25 basis point hike in the Fed funds rate, you don't usually see an exact
00:4225 basis point hike in the 10-year yield or mortgage rates.
00:46So mortgage rates have been actually pretty stable here between 6.5% and 7%.
00:51So the Fed sets the Fed funds rate.
00:54The markets actually set the price of the 10-year yield, right?
00:58So is there a correlation?
01:00There is.
01:01The markets are today pricing in things like the competition for capital in the back end
01:07of the yield curve.
01:07There's the governments competing by issuing government debt.
01:11Hyperscalers are competing by issuing debt to fund their investments.
01:16And those two things at this point, in addition to inflation expectations, are really driving
01:22the price of the back end of the yield curve.
01:24So are they correlated?
01:25Yes, but not directly so.
01:28So we focus a lot on this concept of mortgage spreads as well.
01:32So the rate at which people can take out mortgages relative to the 10-year treasury, that spread is
01:39actually pretty wide right now as well.
01:41So all these things put together, you have now 7% mortgage rates, makes it pretty much
01:47harder to afford the median home in the U.S.
01:51I'm going to go out on a limb and say I think all lawmakers would agree that there are difficulties
01:56for folks getting houses here in the United States.
01:58And you've lived through this odyssey over the course of the last year, lawmakers trying
02:02to pass this housing bill that President threatened to veto and getting through here.
02:05From a policy perspective, what more can Washington do to kind of write the housing picture here
02:09in the United States?
02:10Yeah, I love that question.
02:12And I think there's two aspects, right?
02:15One is, are you tackling the supply side or are you tackling the demand side?
02:20So on the supply side, you might be interested to know that the capital gains exemption for
02:27capital gains from when you sell a home has been set at $500,000 since 1997, right?
02:3430 years.
02:35Yeah.
02:35Home prices are up over almost 250% since then, right?
02:39So if you're interested in bringing supply into the market, addressing that in some way,
02:45shape, or form, I think helps at least get some supply into the market.
02:48So it's not just one thing.
02:50It's a number of different things.
02:50So on the supply side, that's an issue.
02:52We've talked a lot on this show about permitting.
02:54And that's a very local thing.
02:57But I think doing something about permitting helps the supply side.
03:01On the demand side, right?
03:03So what can you do to mortgage rates for mortgage rates?
03:07You've got GSE policy.
03:09Both GSEs have really big portfolios.
03:11They can be instructed, as they have been, to buy agency MBS and therefore narrow the spread
03:17between mortgage rates and treasury yields.
03:20That helps.
03:21You've got bank capital rules.
03:23Bank capital rules, when they're eased and the MBS can be held in bank portfolios, that
03:28also helps, right?
03:29So it's not just one specific thing.
03:31It's three or four things, which in concert, I think, can help.
03:35But the tough part is there's so much inventory that is stuck at lower mortgage rates.
03:40You've got to find some way to kind of like unjam all of it.
03:44On that piece of trying to alleviate the high mortgage rates, which you point out, are near
03:487% now, do things like the Treasury and the moves they're making, issuing more buybacks
03:54on the long end, move the needle?
03:56Or today, what we heard from the BOE in the UK, stopping their selling of the long-term
04:01rates?
04:01It feels like policymakers now are keenly concentrated on the long end of the curve.
04:05Do things like that move the needle at all?
04:07I mean, in the short term, I think they do.
04:09At the end of the day, I mean, Governor Walsh or Chairman Walsh now has said, you know, you
04:16want to let the market set the price of those things.
04:18And the market's speaking loud and clear.
04:21It's basically saying, if you want us to lend you money for 10 years, you need to pay
04:26us.
04:27And if you look at real rates, which is nominal rates adjusted for inflation, they're as high
04:33as we've seen in 20 years, right?
04:35So when you make a fixed income investment, you're actually earning a real rate of return.
04:40The market is speaking to say, we're going to want to be compensated.
04:44So in the short term, these things, these policy things might make a difference.
04:48And, you know, look, the Fed's balance sheet's massive.
04:51Anytime a central bank says, I'm going one way, it's like tough to fight that.
04:56But that is, those are policy decisions.
04:58I mean, our Fed has basically told us they don't want a big balance sheet.
05:01So they're not interested in kind of taking that risk onto their balance sheet.
05:06Could they do policy things like replace the MBS on their balance sheet with treasuries?
05:11Yes.
05:12I think that could make a difference in terms of bringing yields down.
05:16What would it mean if we were to see these GSEs go public in the way that's been bandied about?
05:20I mean, I'm curious, as you see, as you look at that space and the evolution that might take place
05:24here
05:24under this administration over the next couple of years, what are you seeing?
05:28Look, I think, you know, I worked at Freddie Mac when it was a public company.
05:32They have been structured as public companies in the past.
05:36And that has worked.
05:37It worked for the U.S. economy, right?
05:41Those businesses were public.
05:42They ran on public capital.
05:44They ran their securitization machine.
05:47So that's not new for the U.S. markets.
05:51I think the main thing investors like us are focused on is the guarantee of these instruments.
05:57And that's backed by the full faith and credit of the U.S. government right now.
06:01As long as that's intact, I think whether they're really public or private doesn't make a big difference to us.
06:07Now, could it happen?
06:08I think it could, and I think at some point there is value to those entities being public.
06:14There's governance and other things that can really help.
06:17Transparency, the types of risks that need to be taken on those balance sheets.
06:20But right now, the mortgage market is functioning just fine the way they are set up.
Comments