Should investors worry about Fannie, Freddie risk-sharing bonds?

Bloomberg: Prices slumping due to Chinese economy

Despite increasing in prevalence in the last few months, credit risk-sharing transactions from both Fannie Mae and Freddie Mac have some investors worried due to a recent drop in the prices for the bonds.

According to a report from Bloomberg, prices for the risk-sharing bonds have fallen in recent months due to “growing economic concerns about China and other emerging markets.”

From the Bloomberg report:

The notes initially soared after the taxpayer-backed companies started selling them in 2013, as bond buyers clamored for their better quality loans and a chance to nab high-yielding assets tied to the recovering housing market. But around the middle of last year, as supply expanded and investors sold off other risky debt, they started to crash. Then, as the year was ending, they began to surge again.

According to the report from Bloomberg’s Jody Shenn, Invesco Mortgage Capital is one of the largest investors in the GSE risk-sharing deals, which are designed to attract some private capital back into the market and to help alleviate some of the financial risk for the taxpayers.

Here’s Shenn, referencing Invesco’s call with investors this week:

Weakening prices may reflect “increased issuance” meeting a “still developing investor base,” John Anzalone, the REIT’s chief investment officer, said on the call.

Despite the falling prices, the bonds still present an “attractive buying opportunity” due to the extremely low delinquency levels in Freddie Mac’s Structured Agency Credit Risk deals and Fannie Mae’s Connecticut Avenue Securities deals, according to Morgan Stanley analysts James Egan, Jeen Ng and Vishwanath Tirupattur.

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