CNN Money reported that China’s $200 billion sovereign wealth fund, which suffered big paper losses on stakes in Morgan Stanley and Blackstone, is set to invest up to $2 billion in U.S. mortgages as it eyes a property market recovery.

Under the Public-Private Investment Plan (PPIP) launched earlier this year, the U.S. government plans to seed a number of public-private investment funds that would combine taxpayer money with private capital to buy as much as $40 billion in toxic securities from banks.

Compared with TALF, the new and smaller PPIP program focuses on safer toxic securities, which must have triple-A ratings from at least two agencies, and are debts guaranteed by the Federal Deposit Insurance Corporation (FDIC), sources explained.

So, recent talk that China will begin to retreat as the largest holder of US debt in the world are premature and not likely. So the news that China is sniffing around the US Mortgage Backed Securities (MBS) markets is encouraging. The minor amount of mortgages it is said to be planning to purchase is a start and adds to the view that the US housing sector is about to recover. More importantly however, the quality of currently originated mortgages is by the best we have had in years, and their rates are better than treasuries as well as being essentially guaranteed by the government. We wonder why other investors have been slow to recognize the value in MBSs. Property appraisals low, credit underwriting very conservative, the yield about 170 BPs higher than 10 yr treasuries; should be an attractive investment.

Compared to $1.25 trillion of MBS that the Fed has agreed to buy this year, $2 billion is a miniscule amount and may not impact mortgage rates. However, if we continue to see more investors (domestic & foreign) interest in the MBS market, it may help keep the interest rate low even after Fed stops buying Mortgage Backed Securities after Dec 31, 2009.

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