Are Fannie and Freddie Oversold

Panic has set in over Fannie Mae and Freddie Mac. They have taken a necessary hit but is the talk of insolvency justified? Some markets don't think so.

The WSJ published an article today that discusses the current mortgage crisis with Fannie Mae and Freddie Mac.  Perhaps the most interesting part of the article came at the end:

"Fannie and Freddie's bonds haven't sold off to the same extent as their shares; by some measures they are implying less risk than in mid-March, when tensions in the credit markets peaked. "Given how much the shares have fallen, if these were any other financial institutions, their cost of financing would have gone up much more," said Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays Capital.

On Thursday, two-year agency bonds were yielding 0.78 percentage point over Treasury bonds; that gap is double what it was a year ago but analysts say the agencies' financing costs aren't prohibitively high. In the derivatives market, where traders buy and sell contracts that provide protection against bond defaults, the cost of insuring Fannie and Freddie debt has risen 20% this week alone. Still, that cost is a small fraction of what it cost to insure the debt of Bear Stearns Cos. in the days before the Wall Street firm was bought, with the aid of the Fed, by J.P. Morgan Chase & Co. in March."

The bond and derivative markets seem to feel that these companies will be successful in raising fresh capital or that the government will bail them out. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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