Fannie Mae Preferred S (FNMAS)

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Bof A notes the recent rise in both Fannie and Freddie equity trading volume (and price – up 13% and 14% respectively today) as investors increasingly see much more positive long-term outlooks. More from Misra:

http://blogs.barrons.com/incomeinvesting/2013/04/02/bofa-record-fannie-mae-profit-could-hurt-agency-debt-mbs/?mod=yahoobarrons


In a nutshell, the large earnings of GSEs combined with the new way GSEs make payments to the Treasury raises the possibility that not only might the GSEs return all the borrowed capital to the government, but at a surprisingly fast pace. Although we would not be surprised to see episodes of small to moderate widening of debt spreads based on these developments, our view is that this earnings story does not pose a real threat to debt holders….

Based on our understanding of the rules and how we see the government’s incentives, especially around keeping mortgage markets fully functional and maximizing the benefits to taxpayers, we would see widening episodes as buying opportunities. We still like the longest end of the debt curve because we think it prices in the most risk premium for an uncertain GSE future. The Treasury department has reiterated its support of GSE liabilities through the available capital lines. We expect these capital lines to remain available during any transition to a new mortgage finance system given the very limited circumstances under which the capital lines can be terminated.