Risk premiums for Fannie Mae (NYSE:FMN) and Freddie Mac (FRE) debt rose this week as the spread between the yields on the 5 year bonds versus Treasury notes widened. Investors began to question if Treasury Secretary Henry Paulson will step in to bail out the Government Sponsored Enterprises (GSEs) as the government reiterated that it doesn't plan to step in to the help the mortgage giants.
On Monday, August 18th's close, the spreads had widened 7.5 basis points to 103 basis points, the highest since March 17 according to Bloomberg data. Fannie Mae and Freddie Mac equity performed poorly as shares have plunged 28.7% and 24% respectively, over the past two trading days.
Treasury Secretary Paulson received new authority to make unlimited purchases of the stock and debt of Fannie Mae and Freddie Mac if he deems it necessary, as part of the new housing bill signed into law last month. Uncertainty increased in the markets though when a Treasury spokeswoman stated on Monday that, "As the Secretary has said, we have no plans to use these authorities."