Fannie Mae Narrows Duration Gap --- Mortgage Concern Achieves Better Match of Assets And Liabilities It Owns
NEW YORK -- To the relief of some bond investors, Fannie Mae's exposure to interest-rate volatility fell significantly last month, suggesting it has made more progress in correcting a big mismatch between its assets and liabilities.</br></br>Fannie Mae, a publicly traded government-sponsored enterprise, said its duration gap -- a measure of how well cash flows from assets and liabilities match up -- narrowed during October to negative six months from negative 10 months for September and negative 14 months for August. Duration measures how sensitive bonds are to moves in interest rates. A negative duration gap suggests cash flow from Fannie Mae's assets will drop more quickly than the stream of payments it owes its debtholders.</br></br>August's figure of negative 14 months was the largest gap ever and prompted concerns among investors about Fannie Mae's ability to meet its obligations. It also sparked a rally in the Treasury market, as investors anticipated Fannie Mae would need to buy a large amount of Treasurys to cover its gap.</br></br>Although Fannie Mae still had a gap for October, the figure fell just within its target range. Spokeswoman Janis Smith declined to say specifically how Fannie Mae narrowed the gap, citing a policy of not commenting on specific market activity. But, she said, "our mortgage commitments, mortgage purchases, hedging with swaps and swaptions [options on swaps], and callable securities are all vehicles we used to manage the duration gap."</br></br>People in the market said Fannie Mae aggressively bought mortgage securities to adjust its portfolio duration. By buying mortgages, Fannie Mae took cash flows of faster prepaying mortgages and reinvested it in newer, lower coupon mortgages. The newer mortgages, which carry lower rates, aren't likely to be refinanced soon, and that helped narrow the duration gap.