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Testing Paulson's Resolve?
Sectors: Finance
Symbols: FNM, FRE
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It never rains, but it pours; so goes an old adage and while the US authorities are still scrambling to figure out just what to do in the context of the erstwhile jewels, but now broken, mortgage giants Fannie and Freddie Mae foreign investors are beginning to vote, as it were, with their feet. As such, the big news so far this week must certainly be the extent to which portfolio managers at foreign central banks held suspiciously back in their hunger for Freddie Mac's three year note auction. Reuters and the IHT provide the details. On Tuesday, Freddie Mac had to pay a steep premium on a $3 billion
issuance of five-year debt. The company will pay an interest rate of
1.13 percentage points higher than the rate the U.S. government pays
for comparable borrowing. Earlier this year, the premium was as low as
0.6 points, according to Bloomberg.
Even with Freddie Mac's
debt promising investors a rich return, overseas demand for the
issuance was weaker than in the past. Asian investors bought about 30
percent of the debt, while Europeans took 10 percent, according to a
person familiar with the offering. By comparison, for the 12 months
leading up to July, Asian investors accounted for 36 percent of the
company's debt and Europeans held 15 percent, according to data
released by Freddie Mac.
Apparently, the notion of a risk free rate and by derivative security is a rather fickle concept not least in this context where hitherto government grade paper now has to pay a premium 30 bp above the one levied just a few months ago. As always however, there is a silver lining. In this case, it would go something along the lines of how especially foreign institutional investors are cashing in on the call option which was explicitly handed to them as congress approved secretary Paulson to do "whatever it takes" to ensure that the agencies did not run into a default. Moreover, the script for this play was typed already in the immediate aftermath of the Fannie/Freddie bust, as institutional portfolio managers from Asia in particular were quick to denounce the increased risk on their holdings. The main emphasis was consequently that our good foreign fund managers were not holding equity from Fannie and Freddie Mae (which was visibly getting flogged), but rather their debt; and that, naturally, was all but secured by the government.
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