Freddie Buyback News Helps Calm Jittery Agency Market
Dow Jones Business News
Wednesday June 11, 3:15 pm ET
By Julie Haviv, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)-- Freddie Mac's announcement that it will buy back up to $10 billion in reference notes in the next two days helped provide a measure of stability Wednesday to a jittery agency market, rattled by news of two official probes into the housing giant's management reshuffle and accounting procedures.
What's more, some investors view this week's selling pressure in agency debt as a long overdue correction, which is helping improve relative valuations in the agency market.
"The market is certainly tainted by Freddie Mac right now," said Daniel Genter, president and CEO at RNC Capital Management LLC. He oversees $1.6 billion in fixed-income assets, of which 30% is in agency paper.
However, Genter isn't overly alarmed about Freddie Mac and the agency debt sector. He noted that the sector had been very expensive prior to this week's spread widening and that the recent selling has served to improve relative values in agencies against Treasurys.
The session started out badly for agency debt, with investors and traders switching out of Freddie Mac and, to a lesser degree, Fannie Mae debt and into Treasurys.
Selling was driven by news that the U.S. attorney's office in Alexandria, Va., had opened a criminal investigation related to Monday's announcement of management changes at Freddie Mac. That was followed by a delay in Freddie Mac's stock opening, due to an announcement that the Securities and Exchange Commission (News - Websites) had launched an official investigation into the company.
Investigators, including Freddie Mac's regulator, are examining whether several Freddie Mac executives and auditors at Arthur Andersen knowingly misused certain accounting rules to reduce volatility in the company's earnings.
Freddie debt's yield margins over Treasurys, or spreads, widened by up to six basis points in early trade, while its euro-denominated debt saw spreads push out by three to four basis points, to stand 10 basis points wider than last week's levels.
"It's the same story every time there's bad news on Freddie Mac and we some small spread widening this morning," said Frank Will, credit analyst at WestLB in London.
Asian Interest In Reopened Note
But those losses were reversed, and spreads narrowed between one and three basis points, after Freddie Mac announced its plans to repurchase securities ranging in maturity from October 2008 to July 2032 on Thursday and Friday.
The buyback action also helped narrow Freddie's reopened five-year reference note by 2.5 basis points from where it had initially priced, to 18.5 basis points over Treasurys.
That $1 billion reopening, which brings the total outstanding in this note to $4 billion, was fully subscribed chiefly by investment managers and central banks, according to Freddie Mac.
It was sold mostly to domestic investors, but over 20% went to Asian investors, Freddie Mac said.
"We were pleased that the book remained solid in light of this week's events and that the deal has performed well today," said Louise Herrle, vice president and treasurer of Freddie Mac. Asian investors have large holdings of agency debt.
However, even at narrower levels, the spread on the five-year note is still about 3.5 basis points above Tuesday's close and 10.5 basis points cheaper than where the paper was trading prior to Monday's news that Freddie Mac's three top executives had departed amid a regulatory inquiry into its accounting practices.
What's more, some investors and traders are concerned that this week's events could lead to a more lasting shift in investors' attitudes towards Freddie Mac debt and agency debt in general.
"I think customers are going to permanently leave Freddie Mac debt," said Andy Brenner, head of global fixed income at Investec Ernst and Company.
Agency debt securities have long been considered high quality asset paper, but investors are going to start viewing them like corporate bonds, said another agency analyst.
FHLB Suffers Less
Fannie Mae paper has been suffering too from the fallout from Freddie Mac's problems, but on a lesser scale. Spreads on five-year Freddie Mac reference notes have widened by 10.5 basis points since Friday, while the spreads on Fannie Mae's five-year notes have moved out by about seven basis points.
Fannie Mae also bought back $2.76 billion in benchmark notes Wednesday.
Freddie Mac shares, for their part, continued to suffer. They were recently quoted at $50.31, down 2.3%, or $1.18, while the S&P 500 was up 0.5%.
One beneficiary of Freddie Mac's woes may turn out to be the much-less talked about government-sponsored enterprise, the Federal Home Loan Banks.
"FHLB's globals look much more attractive to me right now compared with Fannie Mae's and Freddie Mac's debt," Investec's Brenner said.
Some of FHLB's global debt has outperformed Fannie Mae and Freddie Mac's over the last few days. For instance, FHLB's 1.875% three-year globals due June 2006 have only widened one basis point since last Friday, while Fannie Mae's and Freddie Mac's has cheapened by two and seven basis points, respectively. |
