Risk Premiums On Fannie, Freddie Debt Tighten Rapidly
10/23 11:47 AM
By Prabha Natarajan
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Risk premiums on debt securities issued by mortgage giants Fannie Mae (FNM:$0.7502,$-0.0352,-4.48%) and Freddie Mac (FRE:$0.807700,$-0.022200,-2.68%) received a strong boost Thursday after their regulator reaffirmed that this debt is explicitly guaranteed by the U.S. government.
"The conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae (FNM:$0.7502,$-0.0352,-4.48%) and Freddie Mac (FRE:$0.807700,$-0.022200,-2.68%) ," said James Lockhart, chairman of the firms' regulator, the Federal Housing Finance Agency, at a Senate Banking committee hearing Thursday.
That was music to bondholders ears, who have been concerned about the lack of an explicit guarantee from government officials. And despite Lockhart's assurances, some investors were still doubtful, suggesting the gains seen Thursday may be hard to build on. The two mortgage finance agencies were nationalized by the U.S. government in early September.
"It's the first time we've heard the term explicit guarantee in a public testimony, and the market is reacting to it," said Margaret Kerins, head of agency strategy at RBS Greenwich Capital. "There's clearly better buying across the board," she said.
Risk premiums or spreads on Fannie and Freddie debt securities tightened sharply over comparative Treasury yields as a result. Fannie's two-year benchmark note was 6.8 basis points tighter at 133 basis points over comparative Treasury yields. The Freddie 10-year note was 7.5 basis points tighter at 87.5 basis points over comparative Treasury yields midday, according to data provider TradeWeb.
That marks a turnaround from the selling that has taken place since last week, which pushed risk premiums on agency debt to historic wide levels. That made it costlier for these firms to raise fresh debt in the market at a time when they are being tasked with supporting the ailing mortgage market.
Investors feared agency debt may not carry the full backing of the U.S. government. This stands in sharp contrast to the explicit guarantee offered by the Federal Deposit Insurance Corp. for new bank debt.
The clamoring for clarity on whether such a guarantee exists prompted Lockhart to state that the debt carries explicit government backing at a testimony Thursday.
Despite the market's strong initial response, investors remain doubtful. Many market participants give little weight to Lockhart's comments, seeing them as an attempt to shore up investor confidence and calm the market.
"Until you see a legal document from the U.S. government that directly contravenes the outstanding legal document on Sept. 7 (that outlined the takeover of Fannie and Freddie) that explicitly denies there is any guarantee whatsoever, you must not believe what Lockhart says," said Jim Vogel, an agency strategist at FTN Financial.
Some participants also question whether Lockhart has the power to guarantee debt on the two mortgage finance giants.
Another point to ponder, RBS's Kerins said, is the recommendation by regulators to lower the risk weighting on Fannie and Freddie debt to 10% from 20% for banks holding these securities.
"The question remains that if it is government guaranteed shouldn't the risk be zero?" she asked.
-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@ dowjones.com
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(END) Dow Jones Newswires
10-23-081147ET
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