In This Environment, Buy Agency Bonds

Includes: FMCC, FNMA, SLM
by: David Merkel, CFA

This will not be a long post. Ask yourself this: In this environment, would the U.S. government step away from the mortgage agencies? I think not. If anything, they might invest in its subordinated debt, particularly if there were a conversion into common stock feature.

Spreads are wide, very wide, and I don’t think the government will let the GSEs fail, particularly after raising their lending limits. The agencies will need more capital for lending , so I would expect more preferred stock issues, and perhaps an equity issuance, if to a key investor, like the U.S. Government.

I don’t see the U.S. Government guaranteeing all of the debt of the Agencies, but I could see it doing it for a period of years on new issues, particularly if the Government received equity warrants.

In this wide spread environment, I would be a buyer, particularly versus Treasuries.