The prices of credit swaps on Fannie Mae (FNM) and Freddie Mac (FRE) have doubled over the past two months. The current spreads on the companies’ senior debt tranches also now imply a level of default risk five notches below their current rating at Moody’s. Bloomberg:
Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody’s Investors Service, according to data compiled by the firm’s credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.
As FNM and FRE continue to struggle through one of the worst housing slumps in modern history, investors have begun to worry about the implied government guarantee of the two lenders, and concerns are growing over the potential for a nationalization plan that could wipe out shareholder value.