Loading...
Symbols:
Authors:

Freddie, Fannie: Debt-Ridden, But Their Bonds Are Worth Holding

by: The Society September 05, 2008 | about stocks: FNM / FRE / MBB    

The Sovereign Society

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

By Eric Roseman

Central banks are notorious for their ill-timed investments. The latest such trade was conducted by several Chinese banks in August as they reduced their combined positions in Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) debt.

Erring on the side of caution, you can't blame China's banks for selling Fannie and Freddie debt. After all, many of these banks have already lost billions betting on global stocks recently, including U.S. banks.

But the timing of the sale is just dead-wrong. Right now, both lenders have the implicit U.S. government guarantee that Freddie and Fannie won't fail. Plus, Freddie and Fannie have some of the richest spreads versus Treasury bonds in history. Fannie and Freddie bonds have gained 3% in 2008.

MBB Chart If anything, now is the time to buy, not sell, Fannie and Freddie debt. PIMCO is probably the savviest bond investor in the world with more than US$800 billion in assets.

Recently, PIMCO has been aggressively accumulating mortgage-backed securities.

Last week, PIMCO announced they may be creating a private fund to buy the highest quality mortgage-backed securities.

China's recent paring of U.S. GSE (Government Sponsored Enterprises) holdings is not significant considering all positions are valued at less than US$13 billion.

Both mortgage lenders have issued hundreds of billions of dollars in fixed-income securities over the years. China's slicing of US$23.3 billion on December 31 to US$12.7 billion as of August 25 won't affect GSE pricing in a big way. The figure is not big enough.

Global central banks - including several Asian and Middle Eastern banks - have a bad track record making investments lately.

Sovereign Wealth Funds, or SWFs, have been aggressively buying distressed U.S. and European financial services companies since the sub-prime market exploded in August 2007. These guys have already lost billions on paper since last fall.

Central banks are also notorious for making the worst investment decisions at the wrong time. Over the last decade, a host of central banks have dumped gold just as prices bottomed in the late 1990s.

Are Chinese banks right to reduce GSE holdings this summer? My guess is probably not. I'll bet on PIMCO.

Disclosure: none

Related Articles

This article has 5 comments:

  •  
    Sep 05 02:38 AM
    Uh-huh... Yup, those GSE bonds are a *sure bet*. What with all the bad news "priced in" and all. Yup... no need to mention that massive option-ARM reset tsunami that's about to hit shore from 2009-2012. No sirree...

    Credit-Suisse reset chart 2007-2015

    Fitch Warns on Option-ARM defaults
    Reply
  •  
    Sep 05 02:39 AM
    Links didn't go thru for some reason --here ya' go:

    www.housingwire.com/wp...
    www.housingwire.com/20...
    Reply
  •  
    Sep 05 06:30 AM
    Why is nobody talking about the mass refi that's underway? Fannie and Freddie are cleaning out their portfolio's with refi's and most of those are getting picked up by FHA.

    Bill Gross was double talking yesterday. He was talking about not buying bank CDO's but letting everyone believe he was talking about the GSE's. He's buying up GSE notes like crazy because of the increased credit spreads. Maybe he thinks letting it go would get him an even better spread at the next auction.
    Reply
  •  
    Sep 05 10:36 AM
    I got rid of my Fannie bonds last week. I don't have any faith in the government's word. When I bought the bond initially I was told by my broker GSE meant Government Supported Entity. Now the tune is simply Government Sponsored Entity which is completely different. DO you really trust Ben and Hank? I certainly don't?
    I also carry some Municipal Tax frees at over 4.5% guaranteed by Ambac - that stock has been soaring lately but the bond only fetches 88 cents on the dollar. Go figure? Can you trust anyone in the financial marketplace?
    Reply
  •  
    Sep 08 05:01 AM
    The Chinese were smart to take their losses and continue their acquiring of real assets. Only fools believe the US Dollar is going to continue its current strength. Hyper Inflation is coming and this move of the Government is shouting this.

    How do you remove your debt? Inflate it away - and the US is about to undergo the biggest wave of paper the world has ever seen.
    Reply
More Comments on FNM ยป
More by The Sovereign Society
Investment Resources
Money Managment
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Bonds
Housing & Real Estate
Consumer Credit
Insurance