Bloomberg reports that today’s sale of $3 billion of GSE debt went well, which investors took as a sign that a GSE crisis is not imminent.
However, even this striving-to-be-upbeat article had some threads that bode ill for the longer term. And DealBreaker pointed out earlier this week that there is a profitable arbitrage on offer between Freddiedebt and the Term Auction Facility. A cynic might wonder how much support that factor is offering to these sales.
Fannie Mae and Freddie Mac sold $3 billion of short-term notes at yields that suggest the U.S. mortgage-finance companies are still capable of financing their businesses without government assistance….. Today’s spreads were wide enough to attract demand, yet narrow enough to dim speculation that the government-sponsored enterprises will be forced to turn to Treasury Secretary Henry Paulson for support…..
Merrill Lynch & Co. analysts Kenneth Bruce and Cyrus Lowe today said a bailout of Fannie and Freddie is “premature” because losses won’t cause capital to deplete for several quarters.
Yves here. While Fannie and Freddie debt is mainly short-term, a forecast that “there is enough capital for a few quarters” is far from reassurning. Back to Bloomberg:
Moody’s Investors Service and Standard & Poor’s this month affirmed the top ratings on the $1.5 trillion in senior debt for Fannie and Freddie, citing the likelihood that the Treasury would make sure those bondholders are protected.
So the ratings presume the implicit guarantee is now explicit. Thus the ratings agencies have taken the question of the firms’ own capital adequacy off the table.