The directive for the GSEs (Fannie Mae and Freddie Mac) to purchase bonds at the President's behest complicates their privatization. This action reinforces their role as government policy tools, increasing their dependency on perceived government backing and making a transition to truly private entities more difficult.
If the GSEs hedge the volatility (convexity) exposure of their new mortgage portfolio, as they have historically, it would increase demand for options in the swaption market. This would pressure implied volatility higher, raising the option cost embedded in mortgages and potentially pushing primary mortgage rates up.
Money managers selling mortgage-backed securities (MBS) are unlikely to rotate directly into corporate credit. Despite being underweight corporates, current tight valuations make them unattractive. Instead, managers will likely hold cash and wait for a better entry point from the expected record primary issuance in the corporate bond market.
Unlike the Federal Reserve which can create reserves, Fannie Mae and Freddie Mac (GSEs) must fund their mortgage purchases. While they have significant retained earnings, they will likely need to issue short-term debt, creating a funding challenge as they buy long-duration assets with spreads that are negative to their funding costs.