Foreign Cenbanks Fling Away Agencies as US Banks Await Fatter FDIC Guarantee

 

"Meanwhile, the prospect of the government creating an asset class that would directly compete against and carry a stronger government backing than the government-sponsored enterprises has led to an exodus of investors in debt securities issued by Fannie Mae and Freddie Mac, which are now wards of the state." 

The above is taken from this story,[1] which continues …

Risk premiums on agency debt have been under pressure in recent weeks, raising the funding costs for Fannie and Freddie. On Thursday, risk premiums widened by nearly a quarter percentage point over comparable safe Treasurys before coming in again to end the day around 0.08 point wider.

This ongoing story is not just hypothetical. These numbers directly drive US mortgage rates. The big GSEs are also struggling against a murderously steep yield curve. According to this November 17th story,[2] "Fannie Mae raised $2 billion in its first long-term debt sale in two months, paying record yields over benchmark rates to attract investors." The same DJ reporter who contributed today’s letters-of-fire quote (above) added additional context [3] to this story too.

Monday’s issuance will allow the company to gauge investor demand for its debt, which froze in October. The deepening of the credit crisis that month forced Fannie and its sibling Freddie Mac (FRE) to cancel issuance of long-term bonds.

So it’s really not that surprising that Reuters reported [4] an unusually large $11.74 billion net sale of Agency Debt held by foreign central banks, based as usual on the weekly update from the NY Fed’s H.4.1 table site.[5] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[6] If you examine it you will see that cenbank agencies holdings have fallen in 15 of the 18 weeks since they peaked on July 16.

Last week’s result also reverses the slow moderation in sell-offs we’d seen in previous weeks.

The cenbank buy of treasuries was $6.44 billion, less than what it had been for several weeks. This resulted in a fairly hefty net reduction in total US obligations held of $5.30 billion.

Twist’s ratio graphs show that Agency Debt as a percentage of Treasury Debt held by foreign central banks continues to nose-dive.

 

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Notes and References

[1]: "Banks Await Key FDIC Rulings Friday On Debt Guarantees", by Prabha Natarajan, Dow Jones / CNN Money, November 20, 2008.

[2]: "Fannie Sells First Long-Term Notes Since September in Reopening", by Jody Shenn, Bloomberg, November 17, 2008.

[3]: "Fannie $1 Billion 5-Year Reopening Priced At 101.206, Yields 3.59%", by Prabha Natarajan, Dow Jones / EasyBourse, November 17, 2008.

[4]: "Foreign cenbank agency holdings fall 7th week – Fed", Reuters, November 20, 2008.

[5]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[6]: The updated data set as a Comma Separated Value (CSV) file is here.

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3 Comments for this entry

  1. John M. says:
    November 22, 2008 at 6:42 PM

    Prabha’s still on the case.

    “Agency Debt Investors Cheer FDIC Bank Guarantee Risk Weighting”, by Prabha Natarajan, EasyBourse, November 21, 2008.

    Agency investors cheered the Federal Deposit Insurance Corp.’s decision to put the risk weighting of guaranteed bank debt on equal footing with that of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE).

    But the FDIC’s program still gives bank debt, which will be guaranteed for up to three years, a more explicit, and therefore stronger guarantee than the backing it gives agency debt.

  2. twist says:
    November 22, 2008 at 7:39 PM

    John-

    For some reason, I haven’t been able to find the link, but I’m still wondering what a “stronger guarantee” is. It seems that either something is guaranteed, or it isn’t. I’m assuming the foreign central banks are thinking the same thing, hence the decline in agency purchases and the increase in treasuries.

  3. John M. says:
    November 22, 2008 at 9:00 PM

    twist -

    On October 23rd FHFA’s Jim Lockhart testified that F&F had an “explicit” guarantee. He then immediately “clarified” that they had an “effective” guarantee capped at a clearly inadequate $100 billion each for Fannie and Freddie. That and some further reaction can be found at the Oct 24th episode of this series.

    Where “strong” comes in is the infamous weaselly money quote from Bernanke’s Halloween speech:

    “Needless to say, however, even if alternative organizational structures are considered for the future, the U.S. government’s strong and effective guarantee of the obligations issued under the current GSE structure must be maintained.”

    The markets reacted to that one with the conclusion that the Fed and Treasury were just kidding.

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