bsrsharma, JP Morgan and Goldman have full control over where to invest their own equity, but it’s only a drop in the bucket compared to the Chinese or Japanese FX reserves. Beyond that, the banks manage other people’s money, or lend to other people, and have some influence over the investments but are subject to other people’s will. If JP Morgan starts investing my money, sitting in their fund, in too many GNMAs that I don’t like, I am going to bail.
Why wouldn’t market forces trigger large purchases of GNMAs if they have the same guarantees as Treasuries? Not necessarily, because the two bonds differ in other respects – the time of repayment. If the biggest single buyer is buying only one type of bond, the market forces linking the prices of the two bonds can be stifled. (The price of convexity will be driven higher than in a ‘natural’ market, driving up yields on the GNMAs and rates on new home loans generally.)
Would getting the Chinese to buy more GNMAs ‘fix’ the housing market? Not at all. But if it’s one of 20-30 coordinated efforts going at once you might get some results.
