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Mortgage Based Securities And Covid-19 Impact Case Solution & Answer

Mortgage Based Securities And Covid-19 Impact Case Solution

Introduction

Maya Russel was the head of the global assets, who was responsible for the allocation for largely head investors with several hundred billion dollars in assets. She was preparing for the meeting with her research team.Global financial markets were still suffering in April 2020, as the COVID-19 was spreading at the highest rate throughout the world. Global equity markets originally fell by 30% in response to the pandemic, while high-yield credit markets fell by roughly 20%. In comparison, the US Treasury markets had up 20% year to far (YTD). Interestingly, the mortgage-backed security (MBS) market in the United States was significantly less sensitive to the health-care issue, with showed relatively little volatility during the time and the YTD return of approximately 2%. Maya Russell, asset allocation research head of a prominent global institutional investor, must give a recommendation to her fund’s board of directors on whether her fund’s board should invest in MBS, and if so, whether now is an appropriate time for the fund to execute the allocation, and should it do so by using an active or a passive investing strategy. (Exhibit 1)

Russell’s team had gathered statistics on the current and long-term performance of many asset classes, including: MBS, to help arrange their debate (Exhibit 1a). Russell was particularly fascinated by the MBS’s divergent performance in comparison to other asset classes during the Covid-19’s crisis (Exhibits 1a, 1c and 1g). As the Covid-19’s outbreak became a global pandemic and people were getting contaminated rapidly throughout the globe;the global financial markets saw one of the steepest sell-offs in the history. The MSCI World Equity Index had recovered considerably after plunging by more than 30 percent in March 2020, albeit it was still down 12 percent year to date (YTD). The VIX index (Wall Street’s “fear index”) had above 80% in mid-March, slightly higher than its peak during the 2008 Global Financial Crisis (GFC), and was still much higher than its historical norm. Corporate bond prices, like global stocks, had plummeted throughout the epidemic. This was particularly true for the high-yield (or non-investment grade) bonds, which were still down more than 10% YTD after plunging as much as 20%. In contrast to this, the US Treasuries were up about 20% year to far, boosted by the investors’ demands for safer assets and a recent round of interest rate cuts by the US Federal Reserve. Surprisingly, the US’s MBS market was far less sensitive to the crisis, with relatively minimal volatility during the period and a YTD return of approximately 2%.

Role of Federal Reserve-bank (FED) in the U.S. economy support

Federal funds rate

Since March 3rd, 2020, the FED reduced its goal for the federal funds rate, the amount banks pay to borrow from one another overnight, by a total of 1.5 percentage points, bringing it down to a range of 0 percent to 0.25 percent. FED did so, because the federal funds rates serve as a benchmark for other short-term rates and influence the longer-term rates, this change is intended to cut the cost of borrowing on mortgages, auto loans, home equity loans and other loans, but it will also cut the interest income provided to the savers…………………….

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