Monday, July 14, 2008

Freddie Mac Gets Higher-Than-Average Demand for Bills

(Bloomberg) -- Freddie Mac sold $3 billion of short- term notes, finding higher-than-average demand after U.S. Treasury Secretary Henry Paulson said the government will shore up the mortgage-finance company.

Freddie Mac sold $2 billion of three-month bills at a yield of 2.309 percent and $1 billion of six-month reference bills at 2.496 percent, the McLean, Virginia-based company said today in a statement. 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.

Paulson announced a plan last night to recapitalize Freddie Mac and Fannie Mae if needed to stem a crisis of confidence in the two companies. Freddie Mac and Fannie Mae shares dropped by almost 50 percent last week on concern they may collapse. Fannie Mae and Freddie Mac issue debt to raise money for their purchases of mortgage securities.

``It came in pretty well,'' said Andrew Brenner, who trades the companies' debt as co-head of structured products and emerging markets at MF Global Ltd. in New York, the world's largest broker of exchange-traded futures and options contracts. ``The issues of them having liquidity or not have gone by the wayside for another day. I think it would have gone well anyway. I don't think there's ever been any question that the government would be behind the debt.''

Freddie Mac sells three-month and six-month reference bills every Monday, its Web site said.

Bid-To-Cover

Today's three-month bill auction had a bid-to-cover ratio of 4.16 compared with an average 2.83 in the past three months, Stone & McCarthy said. The six-month bills had a ratio of 3.73,compared with an average 2.51.

Paulson's statement yesterday effectively turned an implicit guarantee into explicit backing, said Christopher Whalen, co- founder of independent research firm Institutional Risk Analytics in Torrance, California.

``Obviously re-nationalization is imminent,'' Whalen said. ``It's a begrudging acceptance of the inevitable.''

Paulson said yesterday he is seeking congressional approval for a ``temporary'' increase of the companies' lines of credit with the Treasury from the current $2.25 billion each, and the right to buy equity ``if needed,'' according to a statement released by the Treasury in Washington. Paulson is seeking unlimited authority for 18 months to buy as much stock as he deems necessary.

Bank Losses

Global banks and finance firms have reported losses of about $410 billion of writedowns and losses, as surging U.S. mortgage defaults sparked a credit crisis. Japan's Fukoku Mutual Life Insurance Co. said there's a risk those losses will spread and said investors should put their money into government debt, recommending Germany or France.

Fannie Mae last week paid record yields over benchmark rates on $3 billion of two-year notes amid concern the company didn't have enough capital. The 3.25 percent notes priced to yield 3.27 percent, or 74 basis points more than comparable Treasuries. That's the biggest spread since Fannie Mae first sold two-year benchmark debt in 2000.

Mizuho Asset Management Co., which oversees the equivalent of $37.5 billion as part of Japan's second-largest bank, said the firm holds no Fannie Mae or Freddie Mac debt and wouldn't be bidding at Freddie Mac's auction today.

``We are concerned about the U.S. housing market, so we don't have any agency debt,'' said Hiromasa Nakamura, a senior fund manager at Mizuho in Tokyo.

Shunning Securities

Governments may also shun the securities, according to Ashley Davies, a currency strategist in Singapore at UBS AG, one of the 20 primary dealers authorized to trade directly with the U.S. central bank.

``Uncertainty will likely deter foreign reserve managers from acquiring additional U.S. Treasury and agency debt,'' he wrote in a report today.

The Fed Board of Governors also authorized the New York Fed to lend directly to Fannie Mae and Freddie Mac through the discount window to meet their liquidity needs if necessary, the central bank said yesterday in a press release.

The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate. Bernanke opened it to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

``We directly bought the agency bonds in the latter half of last year when credit spreads widened,'' said Kwag Dae Hwan, head of global investments at South Korea's $220 billion National Pension Service in Seoul. ``An increasing number of funds investing in that market are sprouting up as spreads have widened abnormally.'' Kwag is considering adding to his agency holdings.

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