I try to limit Beyond the News to single issues but this week we’re covering two that I think are very timely. First, some observations on Trump’s social media post last week that he had ordered his “representatives” to purchase $200 billion of mortgage bonds in an effort to boost housing; second, reports on two new LGIPs and two LGIPs that have changed managers.

How Trump’s Mortgage Purchase Order May Affect Public Funds Investors

President Trump’s post last week that he was instructing his “Representatives” to buy $200 billion of mortgage bonds has a variety of consequences (or non-consequences) for the fixed income market in which public agencies participate. The “Representatives” in Trump’s post are apparently Fannie Mae and Freddie Mac, whose bonds and discount notes are significant in the holdings of public agencies. Some public agencies also invest in mortgage-backed securities, though the allocation is smaller. And of course, there is the matter of impact on the broader fixed income markets.

What are the consequences of Trump’s directive for these investors?

  • $200 billion may seem like a large amount but given the tremendous size of the mortgage market the purchases are unlikely to produce a big move in long-term mortgage rates or in yields on MBS. The initial market reaction to Trump’s announcement was to shrink spreads between MBS and benchmark Treasury yields by 10-15 basis points.   That’s not nothing but also not a change that is likely to spur a resurgence of the housing industry or a change in the fundamental value or liquidity of MBS. I guess that on average over the next year investors could see an overall impact of five basis points on spreads. For the small number of public agencies that invest in MBS, the bump in prices is welcome, but of course they will experience lower spreads for future MBS investments.

 

  • Fannie Mae and Freddie Mac will have to tap the debt markets to fund their purchases. The Trump administration has said the agencies have cash on hand to make the purchases, but this is not apparent from an analysis of the agencies’ balance sheets. Increased borrowing could lead to more supply of federal agency securities and to a favorable (from the buyer perspective) but modest rise in interest rates/spreads that investors receive for buying their discount notes and bonds.

 

  • The MBS purchases will complicate the effort to privatize Fannie and Freddie. This effort is likely to gain steam in coming months.  To support the purchase program the agencies might need some ongoing form of government backing for direct debt issued (discount notes and bonds) after privatization. This is so because they will be intermediating proceeds of their borrowings into holdings of MBS securities that by their nature have uncertain repayment streams. Whether continued government backing for debt issued by the privatized businesses is good public policy or not remains to be seen, but continued guarantees would be a positive for public funds investors. Otherwise, the debt of the agencies after they are restructured would be characterized as obligations of a private sector financial organization and exposed to the dynamics of the private credit markets.

 

Details, Details

The theory behind the Trump announcement seems sound:  Mortgage rates are high so if the government can increase demand for MBS this should put downward pressure on yields. The challenge is in the details.

The MBS market is estimated at $9 to $11 trillion and $200 billion is a small fraction of this.  By contrast, the Federal Reserve bought more than $2 trillion of MBS as part of its quantitative easing effort in 2020-2022 with Fed purchases in 2020-2021 amounting to 90% of new issuance. An analysis by the Kansas City Federal Reserve Bank estimated the Fed’s program reduced interest rate spreads by 0.40%. The $200 billion in purchases would amount only to about 10% of the Fed’s effort so the impact will be much lower.

And keep in mind, the Fed has unlimited capacity to buy and funds it purchases by creating money. Fannie and Freddie have no such capability.

Fannie and Freddie do have working capital, but the amount seems sized to support their existing business, rather than extra to use for the purchase program. As of September 30, 2025, they had combined cash and securities of $316 billion. On first blush one might consider this as a source of buying power, but the two agencies have maintained this level of working capital in the last five years to operate their mortgage origination business. They currently buy, package, and then sell $100 to $150 billion in MBS each month. And their combined balance sheets have expanded by $1.5 trillion in five years. So, their working capital and liquidity ratios are lower now than in prior periods. Hard to see surplus cash here.

Thus, it seems that some/most of the cash to buy $200 billion in MBS securities would have to be raised by the agencies increasing their issuance of discount notes and bonds. Outstandings totaled about $336 billion at the end of September 2025, a significant decline from $808 billion ten years ago (and $1.6 trillion at their peak in 2008). There’s plenty of room in the market for increased supply, and buyers, including public agencies, would benefit from this. Of course, more supply normally requires that the issuer “cheapen” its offering. For public agency investors this would not be a bad result.

Then there are the economics of the MBS purchases. Mortgage rates do not materialize out of thin air; they are essentially a mark-up on the cost of borrowed funds with additions for administration and the risk that the payment stream from the mortgage bonds would fail to match the payments required to repay the borrowed funds.  Borrowing as a GSE, with the implied support of Washington, reduces the cost of borrowed funds. Remove the guaranty and you have, at best, a modestly capitalized but single business line bank. If mortgage rates in a market dominated by highly capitalized multi-line banks are six percent, why would the monoline single purpose financial institution be able to support rates that are notably lower?

Which is an indirect way of suggesting that the program could  be a reason for  Washington  to continue guaranteeing the agencies’ debt   Tasking the agencies with supporting the mortgage market by buying mortgage bonds would seem to require that they continue to access “cheap” money—that is debt backed by Uncle Sam.  Without that the economics simply does not work. Of course, that would increase the footprint of Washington in the capital markets and increase taxpayer exposure (through it’s “guarantee” of agency issuances) to risk.

Some might say we’ve seen this movie before.

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LGIPs: New Pools and Manager Changes

In October 2024 we wrote about local government investment pools changing  managers. It’s unusual but not unheard of in the LGIP business. Sometimes an LGIP simply replaces a manager and sometimes local governments band together to create a new fund to bring in a manager or expand competition in a state.

We’ve seen both recently:

California: CalFIT (California Fixed Income Trust) is a new LGIP that began offering a stable value portfolio in the fall. It invests in government and high grade corporate and bank obligations and is managed by Chandler Asset Management, a California based firm that entered the LGIP business in 2024 when it replaced Public Trust Advisors as manager of the FL SAFE LGIP in Florida. As of December 31, 2025, CalFIT reported $331 million in assets. California has a long-established state-sponsored and three other local-sponsored LGIPs. Large states are well able to support multiple LGIPs. California joins Florida and Texas in this regard.

New York: The EPIC Fund, (Empire Public Investment Cooperative Fund of New York) is in creation. It is sponsored by the Association of Towns and will be managed by US Bank’s PFM Asset Management organization. S&P Global issued a rating for the new fund (AAAm) in December. The rating describes the fund as seeking to maintain a stable asset value by investing only in U.S. government obligations, repurchase agreements and collateralized bank deposits. Other New York LGIPs are managed by Dreyfus, a division of BNY and PTMA Financial Solutions. New York too is a large state. It has been a laggard in LGIP-land because permitted investments for local government investments are limited and the banks have had a strong presence.

New Hampshire: The State-sponsored Public Deposit Investment Pool replaced PFM Asset Management with PTMA Investment Advisors (a successor by merger to Public Trust Advisors and PMA Advisors) after it issued a request for proposals in May 2025 for investment management, record keeping administration and custody services. The fund also replaced US Bank as custodian with UMB Bank. PFM Asset Management had managed the fund since 2015. The fund offers a prime-type stable value portfolio. It reported $679 million in assets in September 2025

Pennsylvania: The state sponsored Invest LGIP outsourced its investment management late in 2025 to Federated Hermes, Inc. For the first 20 plus years of existence Invest was managed and distributed by state Treasury staff. It is the smallest of three LGIPs in the state with $1.4 billion in assets (as of October 2025) invested in prime portfolios managed with the objective of maintaining a stable value. It offers a Daily Pool for local governments and a Community Pool for nonprofit organizations.

A couple of observations:

  • Local government investors benefit from competition among LGIPs that offer them choices and potentially lower fees. The New York Association of Towns, which is sponsoring EPIC pointed to the value of added competition after the merger of Public Trust Advisors and PMA Advisors last year resulted in the consolidation of the separate LGIPs they managed. One of the trustees of CalFIT has cited promoting competition as a reason for supporting a fourth fund in that state. And Pennsylvania Treasurer Stacy Garrity cited lower fees as a reason to outsource management of the INVEST fund.
  • The merger of Public Trust Advisors and PMA Advisors in 2024 seems to have had some unintended consequences. A merger-related effort to combine FL SAFE and the Florida CLASS fund led instead to the FL SAFE Fund giving Chandler an opportunity to enter the LGIP business when it replaced PMA Advisors as manager of FL SAFE. And in New York the merger of PMA-managed and PTA-managed LGIPs seems to have been at least one factor behind the creation of EPIC.