Sellers of corporate debt can take some comfort [1] that their bonds don’t share some of the uncertainty of post-bailout agencies, but what are the implications as the GSEs continue to roll over their paper? In this mostly positive story [2] about today’s record bill sale by Fannie Mae, Bloomberg included an obscure paragraph about foreign participation that should really have been written in letters of fire:

Asian investors bought 12 percent of the latest two-year debt issue, as European investors purchased 8 percent, down from 39 percent and 17 percent in the July sale, according to company data. Central banks bought 27 percent, down from 57 percent. …

 

So on a proportional basis the Asians reduced their participation by over two-thirds and the central banks by over half. That certainly looks significant, and should make tomorrow’s release of FRBNY’s statistics on central bank net holdings of treasuries and agencies most interesting.

We’ve become sensitive to stories about the level of comfort that Asian governments have in agency debt. Today Taiwan put some mild restrictions [3] on the level of exposure to GSE debt of their insurance industry.

In the meantime, there is also the question of confidence in treasuries themselves. One measure [4] of quality seems to be causing some concern. So it’s not just the yield spread between "riskless" treasuries and agencies which is in play, but the absolute yields of both.

________________________

Notes and References

[1]: "Companies paying up to issue more debt: Paying the most on record compared to Treasurys", by Deborah Levine, MarketWatch, September 10, 2008.

Companies may be helped in luring managers who see corporate debt as the lesser evil after the overhaul of Fannie and Freddie.

"Agency bond holders are in a grey area," says Bill Larkin, portfolio manager at Cabot Money Management. Holders of the trillions of those securities have been protected for now but "don’t know what they will own at the end of the maturity if the government restructures the companies. I understand the risks I’m taking on corporate issues and I’m not sure on the agency side."

Agency debt refers primarily to securities sold by Fannie Mae and Freddie Mac.

 

[2]: "Fannie Raises $7 Billion in Largest Single Debt Sale", by Jody Shenn, Bloomberg, September 10, 2008.

[3]: "FSC Restricts Holdings of Bonds of U.S. Mortgage Associations by Insurance Firms", by Philip Liu, CENS, September 10, 2008.

Despite takeover of Fannie Mae and Freddie Mac by the U.S. government, the Financial Supervisory Commission (FSC) still ruled yesterday (Sept. 9) that investments by Taiwanese insurance firms in the bonds issued or guaranteed by the two semi-U.S. government financial institutions, as well as Ginnie Mae (or GNMA, Government National Mortgage Association), can not exceed 50% of their total overseas investments or 25% for each of the three companies.

 

[4]: "Hop, Skip…Socialism", by Joel Bowman, Howe Street, September 10, 2008.

Predictably, the cost of insuring against a potential default on the nation’s ballooning debt soared. The price of 5-year credit default swaps, for instance, leapt to a record 18 basis points. According to an article in this morning’s FT, the US is now considered more likely to renege on its obligations than not just Japan, Germany and France, but also the Netherlands and some Scandinavian countries.