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

To: Crimson Ghost who wrote (51418)	1/25/2006 5:38:30 PM
From: shades	Respond to of 110194

=DJ Freddie Mac Steps Up Defense Of Portfolio Management . By Allison Bisbey Colter of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Freddie Mac (FRE) Chairman and Chief Executive Officer Richard Syron has long argued that the company's mortgage-bond portfolio is conservatively managed. Winding it down would only further concentrate risk in the U.S. financial system because these securities would end up in the portfolios of some of the country's largest banks, he has argued. On Tuesday night, he took both of these arguments a step further, saying Freddie is in a better position than banks to manage the portfolio risk because it funds more of its mortgage bond purchases by issuing callable debt. "People argue that there's too much concentration of risk (in our portfolio), but with callable debt we disperse some of the convexity risk, so it's more widely distributed with us than without us," he said in a speech delivered at a meeting of the Money Marketeers in New York. Critics, including members of the Bush Administration, outgoing Federal Reserve Chairman Alan Greenspan and incoming Fed chief Ben Bernanke, are calling for strict limits on the amount of mortgage bonds Freddie and rival housing agency Fannie Mae (FNM) can hold. They argue that there's too much risk concentrated in the companies' portfolios. But Syron said Freddie effectively outsources the portfolio's sensitivity to changes in interest rates by funding its purchases through the sale of bonds that can be redeemed before they mature. That's because when interest rates on mortgages fall, prompting homeowners to refinance, the housing agency can buy back bonds with higher coupons and issue new bonds with lower coupons. Syron elaborated, saying Freddie has placed its unsecured debt with over 1,000 institutional investors, many of whom cannot purchase derivative instruments, and so are unlikely to buy mortgage bonds. Freddie and Fannie are among the biggest issuers of callable debt in the world, and, through their work with the Bond Market Association, are largely responsible for promoting liquidity in the secondary market by standardizing pricing conventions. Both companies have increased their reliance on callable debt to hedge their portfolio risk after run-ins with regulators over the way they accounted for interest-rate derivatives. "Thanks mainly to our development of the callable debt market, we've been able to reduce our derivative balances to a notional exposure of some $700 billion as of year end 2005," Syron said. By comparison, he said the notional exposure of three of the largest U.S. depositories totaled more than $88 trillion at the end of September. Syron said Freddie currently hedges about 50% of the portfolio's sensitivity to changes in interest rates, or convexity risk, through the callable debt market. It has about $250 billion of callable debt outstanding. By comparison, he said, the top five U.S. banks fund less than 10% of their balance sheets with callable debt. "We don't have to rely on the derivatives market to hedge, the CEO said. "We're the only ones who do it. He said that, in a perfect world, Freddie would hedge each 30-year fixed-rate mortgage in its portfolio with corresponding callable debt - effectively giving the company a "matched book." But demand for callable debt waxes and wanes. For much of 2005, Freddie found it difficult to issue large chunks without offering investors a big price concession. Partly as a result, the company has been issuing more callable debt in smaller denominations through a process known as reverse inquiry, in which investors can request specific terms such as coupons, maturities or the timing and frequency of call dates. Offering this level of customization allows Freddie to borrow more cheaply. Syron said that, despite these limitations, Freddie has been able to manage its interest-rate exposure effectively during periods of high volatility. For example, during the refinancing boom of 2003, when half of the housing agency's mortgage holdings prepaid, it was able to maintain the interest-rate sensitivity of the portfolio at low levels by refinanced much of its debt. Greenspan, for one, hasn't criticized Freddie's track record. The central bank chief has said he's more concerned about whether the company can be relied upon to manage it in the future. He's also said there would be little impact in winding down Freddie and Fannie's retained portfolios, since investors who currently buy the housing agencies' debt would simply substitute mortgage bonds. But Syron doesn't think agency debt and mortgage bonds are perfect substitutes. And even if they were, he doesn't think investors would necessarily reallocate all of the money currently invested in agency debt to mortgage bonds. "Fixed income managers operate against a benchmark that includes a representative allocation of each sector," the CEO said in the prepared version of his remarks. "If GSE (government-sponsored enterprise) debt were eliminated, these investors would probably reallocate their funds in a way that replicates the benchmark of available securities, meaning that mortgage bonds would be the net loser." Freddie estimates that this would result in a net disinvestment from the U.S. mortgage market approaching $1 trillion. "The only way to reduce this disinvestment would be to materially increase the yields paid to investors for buying mortgages," Syron said.

To: Crimson Ghost who wrote (51418)	1/25/2006 5:40:49 PM
From: shades	Read Replies (1) \| Respond to of 110194

DJ Tsys Rocked By Supply, Fed Fears, 10-Yr At 06 High 4.48% . By Michael Mackenzie Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--U.S. Treasury prices slumped Wednesday, rocked by a poorly received two-year note sale amid investor concern over next week's meeting of the Federal Reserve and forthcoming supply in February. In late trade the 10-year note was yielding around 4.48%, up from a session low of 4.41%. The maturity broke the shackles of the 4.32%-4.46% range that had previously sufficed for January. Banks and hedge funds dominated selling flows amid hefty volumes said traders. Treasurys opened for New York trading under pressure and that steadily intensified, receiving a fresh bearish infusion when dealers were left holding much of the $22 billion two-year notes sold by Treasury. The poor auction result weighed upon a market already pondering what reception from investors awaits a large calendar of new Treasury supply slated for February. Meanwhile, the growing proximity of the Jan. 31 meeting of the Federal Reserve was also hampering sentiment for Treasurys across the curve. The Fed is widely expected to raise the federal funds rate to 4.50% from 4.25% next week, and the odds of a further hike to 4.75% in March have moved up to around 70% from 60% of last week. "A weak two-year auction," and "renewed chatter that even with the Fed in neutral next week, the market still needs to be more vigilant to a March hike," were the major factors pressuring Treasury prices said David Ader, bond strategist at RBS Greenwich Capital in Greenwich, Conn. Another factor clouding market sentiment over the Fed is the looming transition at the top. Current Chairman Alan Greenspan will retire after next week's meeting and his replacement, pending a Senate vote, is Ben Bernanke. That and possible policy changes in turn helped explain the reluctance of investors outside Treasury dealers in buying the new two-year note. "We are approaching the Fed meeting and a lot of people didn't want to commit and buy the two-year," said Jason Graybill, managing director at Abner Herrman & Brock Asset Management in Jersey City. Around 3:45 p.m. EST (2045 GMT), the 10-year Treasury note was down 23/32 at 100 5/32 to yield 4.48%. The 30-year Treasury was down 1 and 12/32 at 110 18/32, yielding 4.62%. The five-year Treasury was off 12/32 at 99 10/32 to yield 4.40%, while the three-year note was down 7/32 at 99 29/32 to yield 4.42%. The two-year note was down 5/32 at 99 27/32 to yield 4.46%. Treasury sold $22 billion two-year notes at a high rate of 4.427% and at a bid to cover ratio of 2.11, the lowest since April 2005. Just before the sale, the when-issued two-year was quoted at 4.43%. The indirect bid, a classification of buyer outside primary dealers was a tepid 25.6%, the lowest since April 2005 and under market expectations of around 30%. In December, the two-year indirect bid was 31% and the average for 2005 was 35%. "Dealers are pretty much left holding the auction and there is a risk of further selling in Treasurys as they find a home for the new two-year," said George Concalves, treasury and agency strategist at Banc of America Securities in New York. Earlier in the session, investors largely brushed off data from the National Association of Realtors showing existing home sales in December slipped 5.7% to an annual rate of 6.60 million from November's upwardly revised 7.00 million annual pace. "The housing market is still at historically high levels, but the data are continuing to point to gradual cooling," noted Lehman Brothers. The expectation of slowing housing activity is the foundation of the bond market's view that the Fed will soon end its monetary tightening campaign. That move and continued signs of growth in the euro zone may help chip away at stubbornly low global yields, said William Kohli, portfolio manager at Putnam Investments in Boston. At some point, "the global rate structure has to move higher," Kohli said. The European Central Bank - which has already hiked short-term rates once - could help effect such a move if it raises rates several more times this year, he said. For now many investors expect continued foreign demand for U.S. fixed income assets will help cap any rise in long term yields and interest rate volatility. Particularly with the February debt refunding looming. Treasury Undersecretary for International Affairs Tim Adams told Bloomberg TV early Wednesday that he had "no concerns" about investor appetite at upcoming Treasurys auctions. He also said he was not worried about speculation that Asian central banks and oil-producing countries may shift savings away from dollar-denominated securities. "The U.S. economy is the best place in the world to park your capital.... The dollar is still the best currency in the world, so I'm not worried," he said from the annual gathering of economic and business leaders in Davos, Switzerland. COUPON ISSUE PRICE CHANGE YIELD CHANGE 4 3/8% 2-year 99 27/32 dn 5/32 4.46% +7.9 BP 4 3/8% 3-year 99 29/32 dn 7/32 4.42% +8.7 BP 4 1/4% 5-year 99 10/32 dn 12/32 4.40% +8.6 BP 4 1/2% 10-year 100 5/32 dn 23/32 4.48% +8.9 BP 5 3/8% 30-year 110 18/32 dn 1 12/32 4.62% +8.6 BP 2-10-Yr Yield Spread: 2 BPs Vs 0 BPs Source: TradeWeb -By Michael Mackenzie, Dow Jones Newswires; 201-938-5451; michael.mackenzie@dowjones.com (Steve Johnson and Laurence Norman contributed to this article)