Fannie (FNM) has $120 billion in outstanding bonds maturing at the end of the quarter. Freddie (FRE) has $103 billion. To stave off a bailout, the firms will have to find some way to either pay down this debt (impossible), or roll it over (challenging). The debt market doesn’t like their chances. Bloomberg:
Investors this week demanded an extra 104 basis points in yield to own Freddie’s five-year debt rather than Treasuries of similar maturity, the most since reaching a 10-year high of 114 basis points in March. The gap narrowed to 74 basis points after Paulson’s announcement. A basis point is 0.01 percentage point.
Fannie spreads approached a 10-year high of 104 basis points on Aug. 18, from 74 basis points on July 28. In the decade before 2008, the spread averaged 43 basis points.
“The fixed-income markets are starting to lose faith,” Miller said.
As we’ve discussed, the higher spreads will put likely put additional pressure on mortgage rates, as Fannie and Freddie’s margins will be squeezed (and they’ll seek higher interest to offset this). This, combined with the companies’ plunging stock prices, will likely trigger the bailout before the end of September.
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