Interesting Times in the Agency Market

These are interesting times in the agency market . There is quite a bit of dialogue and conversation between portfolio managers and research people regarding the wide discrepancy between the spreads of the conservatory twins (FNMA (FNM) and Freddie Mac (FRE)) and Federal Home Loan debt.That spread is at historically wide levels. At the current time, 2 year Home Loan paper trades 30 basis points cheap to the FNMA and Freddie Mac. Paper in the 5 year sector is even cheaper, with Home Loan paper 40 basis points cheap to FNMA and Freddie Mac. In the 10 year sector, Home Loan paper trades 10 basis points cheap to FNMA and Freddie Mac.

Home Loan has turned into a prodigious issuer. In July and August there was no net change in outstanding debt. However, in September they turned on the machine and cranked out about $72 billion in debt. Participants observed the issuance as the proverbial canary in the coal mine and dictated wider spreads for Home Loan.

They demand compensation for Home Loan debt relative to FNMA and Freddie debt because investors believe that the conservatorship under which FNMA and Freddie Mac is a safer sanctuary than the free standing Home Loan lending liberally to troubled banks.

In normal times investors viewed these credits through a different lens. While the markets remains in turmoil, Home Loan should remain the unloved stepchild until issuance drops or until the government (to the satisfaction of bond buyers) more explicitly wraps its arms around it.

Comments

[countrybanker:]

Amazing. Please explain to me why FHLB is greater credit risk than FnMA? The latter was bankrupt, not the former. Yes, Paulson injected $100B into an entity with $5T mortgage assets and Guarantees. But, are not the FHLB lending practices quite conservative.

Has FHLB ever taken a loan loss. ? They lend a low % (65%) against a banks best assets, not their junk. In fact, they have a running fight with FDIC that when a bank fails, the FDIC has no good assets left, they are subordinate to FHLB first cliam on collateral?

Please explain?

2008 Oct 02 10:39 PM