Freddie Mac Pays Less to Sell Risk-Sharing Debt After RallyJody Shenn
Bond investors are accepting lower interest rates to potentially share in losses on mortgages guaranteed by Freddie Mac as appetite increases for higher-yielding assets.
The government-backed mortgage giant sold the riskiest portion of $770 million in floating-rate notes today at yields of 3.75 percentage points more than a borrowing benchmark, the McLean, Virginia-based company said in an e-mailed statement. That’s down from a spread of 4.1 percentage points on a similar slice of an August deal.
Fannie Mae and competitor Freddie Mac, which were seized by the U.S. in 2008, are selling such securities to reduce the odds that taxpayers will need to offer them aid. Demand for the debt and other risky assets such as speculative-grade company bonds has increased over the past month as central banks across the globe suppress borrowing costs.
Freddie Mac said it listed the notes on the Irish Stock Exchange’s Global Exchange Market and got preliminary credit-quality designations from insurance regulators to boost demand.
“We continue to make” the securities “more appealing to a broader investor base,” Kevin Palmer, vice president of single-family strategic credit costing and structuring for Freddie Mac, said in the statement.
Yields on previously sold risk-sharing bonds are also shrinking. The junior portion of an April transaction by Freddie Mac rose to 101.2 cents on the dollar today from 97.4 cents on Aug. 6, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The securities, which were issued at par, traded as high as 107.6 cents on July 1 before tumbling as investors soured on risky assets.
Investors should buy the riskier parts of Fannie Mae and Freddie Mac deals because the securities are benefiting from a hunt for yield amid a sixth year of near-zero interest rates from the Federal Reserve, Bank of America Corp. analysts including Chris Flanagan and Ryan Asato wrote in a report last month.
“Buying high yielding paper in a reach for yield while in a low risk-free rate environment appears to be compelling,” they wrote.
Yield spreads on U.S. junk bonds narrowed to 3.93 percentage points yesterday from 4.25 percentage points on Aug. 1, up from a seven-year low of 3.35 percentage points on June 23, according to Bank of America Merrill Lynch index data.
The safer slices of risk-sharing securities also “look attractive when compared to” highly rated corporate bonds, the Bank of America analysts wrote in another report last week that reiterated their recommendation on the riskiest portions. Investors should be cautious about the safer securities, though, because they may get repaid more slowly than forecast, they said.
A slice of today’s Freddie Mac transaction, expected to be rated A- by Fitch Ratings and A2 by Moody’s Investors Service, was issued at a spread of 1.45 percentage points more than the one-month London interbank offered rate, the company said. That compares with a spread of 1.65 percentage points on a similar part of the August offering. One-month Libor was set today at 0.15 percentage point.
The debt is tied to $33.4 billion of mortgages with an average age of 14 months and loan-to-value ratios higher than 80 percent, according to a Sept. 8 report by Fitch.
Freddie Mac and Washington-based Fannie Mae have issued about $10.1 billion of the risk-sharing securities since starting the sales last year, according to data compiled by Bloomberg.