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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (26069)	2/8/2005 4:15:54 PM
From: ild	Read Replies (1) \| Respond to of 110194

Probably Beardstown Ladies sold their FNM shares. (as Patron would say. -g-)

To: Wyätt Gwyön who wrote (26069)	2/8/2005 4:29:02 PM
From: xropotkin	Respond to of 110194

"Separately, chief Securities and Exchange Commission accountant Donald Nicolaisen will testify before a House Financial Services subcommittee about his determination in December that Fannie Mae broke accounting rules. That hearing is set for Feb. 9." marketwatch.com

To: Wyätt Gwyön who wrote (26069)	2/8/2005 5:07:42 PM
From: ild	Read Replies (4) \| Respond to of 110194

Agency Debt Investors Could Be In For Rough Ride By ALLISON BISBEY COLTER February 8, 2005 4:58 p.m. Of DOW JONES NEWSWIRES NEW YORK -- Agency debt securities have proven remarkably resilient over time in the face of the accounting scandals at Fannie Mae (FNM ) and Freddie Mac (FRE), thanks in part to dwindling issuance and solid demand from Asian investors. But investors could be in for a rocky ride in the coming weeks as lawmakers and the Bush administration push for more stringent regulation of Fannie Mae and Freddie Mac. The market's chief concern is what powers a new regulator would have to unwind the housing finance companies' operations in the event either became insolvent, and how this would impact their triple-A credit ratings. Risk premiums have already widened considerably since three Republican senators introduced legislation that would create a new regulator with receivership powers at the end of January. Fannie Mae's 4.125% note due April 2014 currently trades at 2.0 basis points, or 0.02 percentage point, above the London interbank offered rate, compared with 6.5 basis points below Libor before the bill was introduced. By comparison, the yield on Fannie's April 2014 issue jumped out to 11 basis points above Libor in September when the housing finance companies' regulator, the Office of Federal Housing Enterprise Oversight, first raised questions about Fannie's accounting. The going could get even tougher as the regulatory process heats up. On Monday, the Bush administration stressed the pluses of giving a new regulator for the housing finance agencies' receivership powers in its budget for fiscal year 2006, saying this would minimize systemic risk, address any "misperception" that the housing agencies are backed by the U.S. government and improve market discipline over the companies. The spotlight will shine on the housing agencies throughout the week. On Wednesday, Securities and Exchange Commission Chief Accountant Donald Nicolaisen is scheduled to testify in the House of Representatives on his recent decision that Fannie violated rules governing accounting for derivatives. And on Thursday, the Senate Banking Committee holds a hearing to review whether Fannie and Freddie are fulfilling their mandate to expand homeownership. Fannie and Freddie's credit ratings are underpinned by the perception that their senior debt is implicitly backed by the federal government. So any legislation that is seen by investors as jeopardizing this backing - and hence the triple-A ratings - could result in substantial volatility. Timothy Rowe, a senior portfolio manager at Smith Breeden, said a downgrade would limit the potential universe of agency investors and could push risk premiums on 10-year agency debt 0.10 to 0.20 percentage points beyond their recent range. "We put a pretty low probability on any sort of donwgrade, but it is a pretty nasty scenario," Rowe said. "That's one of reasons we're underweight." In particular, Rowe said the loss of a triple-A-rating would likely undermine demand from one of the agency debt market's key area of support, Asia. These investors take up a hefty chunk of new agency debt issuance - at Freddie Mac's most recent sale of 10-year notes in January, for example, Asian investors bought around 40% of the $3 billion in new notes. A Buying Opportunity Of course, Fannie and Freddie have been down this road before - previous attempts to overhaul regulation in 2003 and 2004 stalled. Yield margins, or spreads, on agency debt widened, only to tighten again once the immediate impact of the headlines had diminished. "Historically, it has generally proven to be an opportune time to add to agency holdings whenever spreads reacted to headline news," said Gerald Lucas, chief of Treasury and agency strategy at Banc of America Securities. He said investors are becoming hardened to these news shocks and the dearth of supply is helping keep spreads from widening significantly. Moreover, some of the regulatory changes being contemplated would be good for agency debtholders. In addition to receivership powers, the bill introduced by Sen. Chuck Hagel, R-Neb., Sen. John Sununu, R-N.H. and Sen. Elizabeth Dole, R-N.C., last month would also give a new regulator more discretion in setting capital levels and approving new business activities. This kind of stricter oversight could lower the possibility that Fannie or Freddie would end up in receivership in the first place. Tighter controls on capital levels and new business activities would also tend to limit Fannie and Freddie's funding needs, further reducing new debt issuance. New supply from the housing finance agencies has dwindled in the past year - Freddie Mac's long-term debt issuance was down 15.6% in the year to end-September 2004, according to Bond Market Association data. Fannie Mae's long-term debt issuance dropped 18.9%, according to BMA data. Current yield margins on agency debt - Fannie Mae's 4.625% 10-year benchmark was quoted at 0.39 percentage point over Treasurys late Tuesday - may also reflect lingering skepticism among investors that any legislation will be passed at all - which could mean spreads could become even more volatile if legislation to overhaul their regulation comes closer to passing. Analysts at Barclays Capital believe the chances of a bill eventually passing as currently envisioned are less than 50%. "However, the likelihood would climb to 75% if, in addition to some kind of receivership clause, the bill also includes market-calming language that implies some kind of link to the government," they said in a research note this week.