Fannie, Freddie Shares Rebound On Strong Debt Sale

As more level-headed analysts weighed in on the recent downward cycle hitting twin mortgage financial giants Fannie Mae (FNM: 0.59 0.00%) and Freddie Mac (FRE: 0.65 +1.56%), and as Freddie Mac saw a planned debt auction draw strong demand, both GSEs saw shares rebound strongly Monday from last week’s selloff.

On a day where the Dow Jones Industrial Average fell more than 230 points, common shares in Fannie Mae rose 7.4 percent and Freddie saw shares soar more than 18 percent. Fannie was at $5.37, and Freddie at $3.33, when this story was published.

“The recent GSE sell-off has been surprising, since the only catalyst was apparently a press report suggesting that federal officials are likely to recapitalize the GSEs soon,” Citigroup’s Bradley Ball wrote in a letter to investors, according to Reuters, echoing much of what HW heard from sources last week. “Agencies continue to fund themselves.”

The GSEs were sent into their latest spiral by a Barron’s report that offered little in the way of new insight into either Fannie and Freddie — a stance HW took when the report first surfaced; the story quoted unnamed Bush administration officials as suggesting nationalization was imminent. Citigroup’s Ball, along with HW’s sources in the bond trade, said such talk was unfounded.

Freddie’s $2 billion auction of short-term debt was met with strong demand Monday. Bloomberg News reported on the details of market response: $1 billion of three-month notes went at a yield of 2.58 percent, 90 basis points above Treasuries, while $1 billion of six-month debt went at a yield of 2.858 percent, roughly 92 basis points above Treasuries.

Bid-to-cover ratios were at 3.42 and 3.95 times the securities offered for the three and six-month notes, respectively, according to Bloomberg — indicating strong investor demand for the debt.

Democratic Presidential hopeful Barack Obama also suggested Monday that both GSEs were too big to fail, signaling support for the Treasury’s move to backstop the operations of both Fannie and Freddie.

“Here’s the problem: If Fannie Mae and Freddie Mac collapsed, then probably the financial system would receive such a body blow that it could be disastrous,” Obama said at a question-and-answer session with voters in Iowa, according to a Reuters report.

“You probably couldn’t get a mortgage,” he said.

He later suggested that the GSEs would need to sit squarely in either the public or the private sector, hinting at policy direction should the Senator win his current White House bid. Republican White House hopeful John McCain has endorsed the “Baby Bell” approach proffered by former Fed chief Alan Greenspan, which would see the GSEs nationalized, broken up, and sold back into the private market in separate pieces.

Disclosure: The author was long FRE when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.