Friday, February 26, 2010

Fannie Buyouts: Timing and Opportunities [JP MORGAN RESEARCH]

The past few days have witnessed some of the largest swings in the roll market ever. The culprit: a massive
shift in the market’s consensus on when buyouts will take place. Freddie’s announcement was
straightforward, stating that buyouts would be 100% completed in February. But Fannie’s announcement
was more nuanced, with the timing of the purchases occurring “within a few month period.” The
uncertainty in the buyouts has left the Fannie Mae market highly unstable – hence the 4-6 tick swings in
roll prices yesterday.

As we stated in our most recent Securitized Products Weekly, we believe the buyouts will be more frontloaded
(i.e. occurring most likely in March). We review some of the arguments below, and offer a
framework for trading mispricings across the roll market.

Fannie Buyouts Timing And

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