Freddie Macand Fannie Mae are returning to favor among bond investors even as stockholders lose confidence after the Treasury threw its support behind the biggest U.S. mortgage-finance companies.
Vanguard Group and Federated Investors Inc. said they will continue to buy the short-term debt of the companies and the cost to protect debt of Fannie Mae and Freddie Mac from default fell to the lowest in two months yesterday. Washington-basedFannie Mae fell 5.1 percent in New York Stock Exchange composite trading yesterday, for a decline of 76 percent this year. Freddie Mac, based in McLean, Virginia, dropped 8.3 percent, bringing its 2008 loss to 79 percent.
The division between bonds and stocks shows that investors are confident U.S. Treasury Secretary Henry Paulson won't permit the collapse of the companies that own or guarantee almost half the nation's mortgages. Shareholders are at greater risk because the government-sponsored companies may require new equity after already raising $20 billion in the past year to cover losses.
``There's no way the government is not going to make that debt good going forward,'' Paul Miller, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, said in an interview with Bloomberg Television. The chance that shareholders will have their holdings diluted ``gets higher and higher,'' he said. ``There is a lack of confidence in Fannie and Freddie stock right now.''
`Ensuring Access'
Paulson sought to shore up investor confidence July 13 when he said from the steps of the U.S. Treasury that he will seek authority to buy equity stakes in Fannie Mae and Freddie Mac and increase the government's credit lines to the companies. Last week, their shares fell 50 percent and credit-default swaps on Fannie and Freddie bonds approached record highs.
``The priorities here are ensuring access to the capital markets and protecting the taxpayer, while the existing shareholders are third at best,'' Credit Suisse analysts Moshe Orenbuch and Rajat Bhu in New York wrote in a report yesterday.
Fannie Mae dropped 58 cents, or 6 percent, to $9.15 at 7:30 a.m. in pre-market New York trading. Freddie Mac fell 16 cents, or 2.3 percent, to $6.95.
Almost 216 million Fannie Mae shares were traded yesterday in New York, 22 percent of the stock outstanding, as the stock fell 5 percent. Almost 263 million Freddie Mac shares changed hands, or 41 percent of the total, as it dropped 8.3 percent.
Fannie Mae's 5.5 percent perpetual preferred shares declined about 5.4 percent to $24.30 and slid 50 percent in the past year. Freddie Mac's 5.57 percent preferred stock dropped 4.6 percent to $11.16 and is down 52 percent since being sold in January 2007.
New Deal
The government is depending on Fannie Mae, created in 1938 as part of President Franklin D. Roosevelt's New Deal, and Freddie Mac, formed in 1970, to help revive the home loan market. Banks and lenders worldwide recorded more than $415 billion in losses and writedowns from subprime-related securities, forcing them to restrict lending.
Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a $2.25 billion credit line. Paulson wants to increase the facilities, making the government's implicit guarantee of their debt more explicit.
`Strong Positive'
Money funds, considered the safest investments outside bank deposits, favor the short-term debt of government-sponsored agencies because of the implicit guarantee. U.S. taxable money funds, which have $3 trillion in assets, own about $70 billion in debt issued by Fannie Mae and Freddie Mac, according to Crane Data LLC in Westborough, Massachusetts, which tracks money-fund data.
Paulson's proposal ``is a strong positive for the marketplace as a whole,'' said David Glocke, a money manager for Vanguard in Valley Forge, Pennsylvania, which oversees $170 billion in money funds.
Freddie Mac received higher-than-average demand for a $3 billion sale of short-term debt after Paulson's announcement. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was more than 50 percent above the average of the past three months, according to Stone & McCarthy Research Associates.
Bond Risk Falling
Federated, which manages $225 billion in money-market mutual funds, is holding onto the companies' debt, said Deborah Cunningham, chief investment officer of taxable money funds at the Pittsburgh-based firm.
The cost to protect debt of Fannie Mae and Freddie Mac from default fell to the lowest in 10 weeks, credit-default swaps show. Contracts on the senior debt of Fannie Mae dropped 16 basis points to 40 basis points and Freddie Mac fell 15 to 40, according to CMA Datavision.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Fannie Mae and Freddie Mac debt yields narrowed compared with government securities. The difference between yields on Fannie Mae's 5-year notes and Treasuries of similar maturity fell as low as 76.4 basis points, the narrowest since June 5, before settling back at 80.8 basis points, according to data complied by Bloomberg.
