Foreigners have been America’s best friend over the last couple of years. They’ve kept bailing us out. Whether it be dodgy real estate, or even dodgier banks, foreign money is just about the only thing keeping the financial system afloat. But as the Economist reports, it looks like Fannie Mae (FNM) and Freddie Mac’s (FRE) crisis has recently been exacerbated by Chinese and other Asian central banks saying enough is enough. The Economist:
Spreads on the $1.5 trillion of paper issued on their own behalf have widened significantly. A five-year issue by Freddie on Tuesday sold for 1.13 percentage points over treasury bonds, the highest spread for at least a decade. As recently as May, Freddie had found takers at 0.69 points over treasuries. A sudden pullback by overseas investors is largely to blame. Foreigners, mostly Asian central banks and funds, hold 35-40% of the mortgage agencies’ total debt. They continued to be avid buyers this year, but their appetite waned dramatically in the first half of August.
…The situation in agency-backed MBS is even worse, with foreign buyers all but on strike. China’s central bank, which alone had been lapping up more than $5 billion-worth a month, has barely touched the stuff in recent weeks. The spread on the securities has risen to around 2.2 percentage points over government bonds, even wider than it was during March’s turmoil (after adjusting for today’s lower volatility).
All of which means that the US is going to have to eat its own cooking from now on. Prepare the vomitorium.
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