By Lynn Adler
NEW YORK, April 9 (Reuters) - Foreign investors are
snapping up more U.S. agency debt, reaching for yield and
safety as interest rates slide in a shrinking Treasuries pool
and equities plunge.
Three 1/2-point Federal Reserve rate cuts this year and
deep stock market losses amid corporate earnings woes are
driving foreign money into debt sold by Fannie Mae <FNM.N>,
Freddie Mac <FRE.N> and other U.S. home finance giants.
The pattern, in place for months, shows no signs of
slowing.
"I would expect foreign buying of agencies to continue to
trend upward as more of those securities are sold in more
liquid forms and Treasuries continue to shrink," said Nancy
Vanden Houten, an analyst at Stone & McCarthy Research
Associates.
Foreign central bank holdings of agency debt have risen
while Treasuries holdings have fallen since the New York Fed
began reporting these comparisons weekly in February 2000.
That is mainly because the Treasury Department has used
surpluses to pare the amount of government debt it sells. The
resulting shortage, and this year's Fed rate cuts aimed at
stimulating the ailing U.S. economy, make agencies a
higher-yielding, liquid high-grade alternative.
Various data indicate "that foreign investors, including
central banks, have been liquidating Treasuries and buying
agencies," Vanden Houten added.
In the week ended March 28, the New York Fed held $120.3
billion in agency debt and $604.6 billion in U.S. government
securities in custodial accounts on behalf of foreign central
banks. The following week, the first of this quarter, agency
holdings rose to $124.6 billion and Treasuries dipped to $602.9
billion.
The amount of Treasuries held slid from $612 billion in
February 2000, when the Fed began reporting these figures on a
weekly basis. Agencies holdings, in contrast, jumped from $83
billion in the same period.
Treasuries holdings had been even lower, at $589 billion at
the end of 2000. But safe-haven flows out of stocks and into
fixed-income investment boosted them in the first quarter.
OUTREACH
"The GSEs (government sponsored enterprises) have
collectively done a tremendous amount of marketing globally,"
said Louise Herrle, vice president and treasurer at Freddie
Mac. "The supply of Treasuries is shrinking. These (foreign)
entities need to have high-quality alternatives, and agencies
have been the natural alternative for these portfolios."
Freddie Mac's euro-denominated note program, begun last
year, has raised awareness and lured more overseas buyers to
cross over to dollar-denominated offerings, she added.
"That trend is going to continue," Herrle said. "We do
anticipate foreign buying to increase as a percentage" of
overall debt issuance.
When the agency sold $5 billion of 10-year notes last
month, foreigners bought 29 percent, near the all-time high of
30 percent for that maturity.
Those notes were priced to yield 84.5 basis points more
than Treasuries. The yield spread has since been pared to 79
basis points. Agencies have put in a strong showing in recent
weeks amid chaotic swings in equities and Treasuries.
THE WINNING SIDE OF POLITICS
Politics are one reason for the growing comfort foreign
investors have with the agency market, strategists said.
The market was in turmoil a year ago, when Rep. Richard
Baker, R-La, sponsored a bill to overhaul the agencies and
supported a measure to repeal never-used but widely symbolic
Treasury credit lines to the GSEs.
The credit lines lend a market view of implied government
backing, which in turn lowers GSE borrowing costs.
Last year's bill failed and this year Baker introduced a
bill that would put the Fed in place as a stronger regulator of
Fannie Mae and Freddie Mac.
Enhanced oversight is generally welcomed by the market,
whether or not the Fed is ultimately selected. And more
importantly to the market, the new bill does not touch the
sensitive credit lines.
"All the publicity has resulted in (foreign investors)
learning more about what we do and why, and I think after they
learned all that, maybe they feel better about what we do and
why, and they feel that it's a suitable investment for them,"
said Mike Ciota, a spokesman for the Federal Home Loan Banks. |
