This Day In Market History: Fannie Mae Rolls Out First Stripped Mortgage-Backed Securities

Each day, Benzinga takes a look back at a notable market-related moment that happened on this date.

What Happened

On July 11, 1986, the Federal National Mortgage Association FNMA issued the first stripped mortgage-backed securities to enable purchase of interest-only or principal-only bonds.

Where Was The Market?

The Dow and S&P 500 closed down at respective rates of 1,821.43 and 242.22.

What Else Was Going On In The World

The inaugural Goodwill Games were taking place in Moscow in response to national Olympic boycotts. The U.S. Supreme Court had recently ruled to uphold affirmative action and eliminate the Gramm-Rudman deficit-reduction law.

Fannie Mae Convolutes The Trading Game

Fannie Mae’s financial engineering provided investors a pure bet on the direction of interest rates. When rates rise, interest-only strips follow suit as principal-only strips fall.

The concept, built on mortgages backed by the Federal Housing Administration and the Veterans Administration, is akin to Treasury STRIPS introduced a year prior.

In the first two months of marketing, the Association sold $1 billion of stripped mortgage-backed securities to Goldman Sachs Group Inc GS.

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