The severity of the US mortgage crisis was underscored on Tuesday as Freddie Mac, one of two government-sponsored enterprises that underpin the US housing market, paid its highest risk premium yet on a five-year debt issue to raise $3bn (£1.6bn).
The sale of the Freddie bonds yielding 113 basis points more than comparable Treasuries came less then a week after Freddie’s rival, Fannie Mae, paid a record 122.5bp more than Treasuries to lure investors to a three-year issue that raised $3.5bn.
Freddie and Fannie shares on Tuesday fell 5.01 per cent and 2.28 per cent respectively, extending a slide that began on Monday after an article in Barron’s suggested equity investors could be wiped out by a government plan to rescue the two GSEs. The Treasury said it had no intention of forcing such an outcome.
The Treasury’s interim rescue plan for the mortgage financiers made a historically implicit guarantee for their debt increasingly explicit. However, debt investors have demanded higher risk premiums because of uncertainty over the details of any bail-out and fears about deterioration in the housing market.
“This sale [was] seen as a key test of the quasi-private status [of Fannie and Freddie]”, said Michael Englund, analyst at Action Economics.
The five-year Freddie notes were sold with a yield of 4.172 per cent, 113bp over Treasuries. That compares with a spread of 69bp on a five-year Freddie issue in May and a spread of 105.5bp on notes sold in March around the time of the Bear Stearns collapse.
Analysts were encouraged that the deal was oversubscribed and that participation by Asian investors – important buyers of GSE debt – increased in the Freddie sale from the levels seen in last week’s Fannie issue.
Investors also appeared relieved that Freddie succeeded in selling the notes, pushing down spreads on other GSE and mortgage debt. The new Freddie issue also tightened to 106bp over Treasuries by day’s end.
Asian investors bought 30 per cent of the Freddie deal on Tuesday, up from 22 per cent for the Fannie issue last week. In May, Asian investors bought 41.3 per cent of Freddie’s five-year issue.
Fannie’s debt sale last week appeared to show that Asian investors and central banks were beginning to scale back their involvement amid the uncertainty surrounding the groups.
