Posted on 07/29/2003 5:44:57 PM PDT by Starwind
US Agency Debt Sees Worst 2-Day Performance Since June
. By Julie Haviv Of DOW JONES NEWSWIRES
(This item originally ran at 1935 GMT)
NEW YORK (Dow Jones)--Agency debt securities had yet another tumultuous session of selling Tuesday as a major investor base, Asia, soured on the sector.
Securities backed by Fannie Mae (FNM) and Freddie Mac (FRE) widened three to 6.5 basis points across the yield curve in Tuesday's session. Add that to Monday's four-to-five basis point cheapening - and you have the worst two sessions in recent history, excluding the week of Freddie Mac's management shakeup in early June.
Late Tuesday, Fannie Mae's 3.25% five-year benchmark notes were quoted at 46.5 basis points over the five-year Treasury note, six basis points wider than where they were trading late Monday.
Freddie Mac's 4.5% 10-year reference notes were quoted at 64.0 basis points over the 10-year Treasury note, six basis points wider on the day.
Back in June, the selling was mostly a kneejerk reaction as investors were unnerved by the news of the departure of three top executives at Freddie Mac amid several inquiries into the housing-finance company's accounting procedures.
But this time around, the unloading of agency debt could be more dangerous for the sector since it may actually involve a change in overseas sentiment.
Very heavy selling from Asian central banks was noted in the overnight session, after news reports, citing anonymous sources, said that the European Central Bank is selling all of its Fannie Mae and Freddie Mac holdings and advising the national central banks in the euro zone to do the same.
That selling came on top of a smaller-than-usual participation by Asian investors in Fannie Mae's reference note auction last week.
"The Asian investors heard what the European central banks may be doing and asked themselves `what do they know that we don't know', and so they sold," said Andy Brenner, head of global fixed income at Investec Ernst and Company.
And while European investors aren't seen as big sponsors of agency debt, Asian selling is a different matter, as Asian investors own a significant amount of Fannie Mae and Freddie Mac debt.
Last year, Asian investors held 21.7% or $13.617 billion of Fannie Mae's debt, while European investors held 10% at $6.275 billion. International participation for 2002 was at 31.7%.
Asian interest in Freddie Mac's five- and 10-year reference notes has been quite strong this year, standing at 22% as of June 30 compared with 12% in 2002. European interest came in unchanged at 12%.
A Reuters story published Tuesday afternoon, quoting a national central bank source, essentially debunked the idea of the ECB advising member central banks on agency debt holdings. But that wasn't enough to halt the market's slide.
"Once the momentum starts, it's hard to reverse it," Brenner said.
The agency market is clearly very skittish right now.
`We do not recommend anyone base buy/sell decisions on whatever the "truth" turns out to be concerning the ECB," said Jim Vogel, senior vice-president at FTN Financial Capital Markets in Memphis, Tenn. "The overall market understands the credit quality and trading characteristics of agencies and that is what ultimately determines values."
Vogel said that there is a lot more going on in the fixed income markets this month, and agency values aren't necessarily at the top of most traders' and investors' agendas.
Some analysts pointed to the volatility in the Treasurys market as another reason for the agency market's skittishness. Treasurys flip-flopped Tuesday throughout the session. Late afternoon, the 10-year note's yield quoted at 4.385%, the session high and a sharp rise from its low at 4.206% earlier in the session.
Negative sentiment towards Fannie Mae and Freddie Mac debt isn't bolstering investment in alternative agency debt, such as Federal Home Loan Banks and supranationals, one agency trader said.
And some market participants believe the agency market's doldrums are overdone.
"The market looks like it's very oversold," said Peter Loftus, first vice-president and senior portfolio manager at HSBC Bank USA. "People have been looking at technical levels for support, but when the market gets a directional bias to it, people will almost blindly go about accomplishing what they need to do without really thinking about it,"
Loftus, who oversees $150 million in agency-debt securities in a $1.5 billion fixed-income portfolio, said he hasn't sold agency debt in recent days, but added that the recent spotlight on Fannie Mae and Freddie Mac is causing many to shy away from the sector.
-By Julie Haviv, Dow Jones Newswires; 201-938-2071; julie.haviv@dowjones.com
(END) Dow Jones Newswires
07-29-03 2033ET- - 08 33 PM EDT 07-29-03
Normally a good point, but the real problem is not what the headline would assume but rather a shift in the sentiments of foreign banks to buy Freddie Mac and Fannie Mae MBS:
Very heavy selling from Asian central banks was noted in the overnight session, after news reports, citing anonymous sources, said that the European Central Bank is selling all of its Fannie Mae and Freddie Mac holdings and advising the national central banks in the euro zone to do the same.
This raises the interest rates Fannie and Freddie must pay which may inturn severely impact the derivatives they and others are tied up in, for which derivatives and their accounting both Fannie and Freddie are now coming under scrutiny. The scrutiny may in fact be driving some to dump agency debt before any problems (unknown at present) cause losses and a collapse in the MBS market - which supports both the real estate market and indirectly helps The Fed Reserve pump money into the economy.
This could be the second to fall over in a line of really big dominoes.
I was thinking GSE derivative dominoes, but now I'm wondering what your 1st dominoe?
I don't think we're using the Constitution anymore. If we were they would cite the General Welfare clause.
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