By Jody Shenn
July 18 (Bloomberg) -- Investors in Asia and Europe snapped up a $3 billion sale of Freddie Mac bonds at near record yields, a sign that the beleaguered mortgage finance company has the support of foreign central banks.
Investors outside North America including central banks bought 61 percent of the two-year notes yesterday, McLean, Virginia-based Freddie Mac said. That compares with 55 percent in its last sale of securities with the same maturity in May.
Freddie Mac fell 64 percent in New York Stock Exchange trading during the past month and Fannie Mae lost 56 percent of its market value on concern they may not have enough capital to survive the housing slump. Treasury Secretary Henry Paulson announced a rescue plan for the nation's biggest mortgage companies on July 13 and the Wall Street Journal reported today that Freddie Mac may sell $10 billion of new shares, citing people it didn't identify.
``We're operating as business as usual this week,'' Treasurer Timothy Bitsberger, who was assistant secretary for financial markets at the Treasury before joining the government- chartered company in 2006, said in a telephone interview. ``The dramatic change is that we're just under a very large, powerful microscope.''
Wider Spreads
Freddie Mac and Fannie Mae rely on foreign institutions to finance their business. The Federal Reserve held $983.9 billion of so-called agency debt on behalf of international investors as of July 16, up from $950.9 billion on June 4 and $1.83 billion in 2003.
While some investors may have lost confidence in the companies, ``all I know is that we've been able to sell paper this week,'' Bitsberger said.
Freddie Mac fell 64 cents, or 7.7 percent, to $7.69 at 11 a.m. in Frankfurt, where 38,000 shares traded. Shares in Fannie Mae dropped 47 cents, or 4 percent, to $10.45 with about 16,000 shares changing hands.
Yields on the companies' debt rose relative to Treasuries this week as Paulson's plan to seek authority from Congress to pump equity into Fannie Mae and Freddie Mac and to increase their lines of credit met resistance from lawmakers. Freddie Mac and Fannie Mae weren't the only ones facing wider spreads, Bitsberger said. Corporate and mortgage debt spreads also increased.
`Decent Incentive'
The gap, or spread, on Freddie Mac's benchmark debt widened to 83 basis points, from 50 basis points on Dec. 31, according to Merrill Lynch & Co.'s U.S. Agencies, Freddie Mac Reference Notes Index. The premium rose as high as 101 basis points in March, compared with 34 basis points a year ago. A basis point is 0.01 percentage point.
Freddie Mac's reference notes yesterday sold at the widest spread to Treasuries in at least five years. The debt was priced to yield 3.358 percent, or 88 basis points more than U.S. government debt of similar maturity.
``You have better liquidity in Treasuries, but 88 basis points is a fairly decent incentive,'' said Daniel Fuss, vice chairman of Loomis Sayles & Co. in Boston and co-manager of the $18 billion Loomis Sayles Bond Fund. The companies' notes are ``selling where they ought to sell,'' he said.
Freddie Mac received higher-than-average demand earlier this week for $3 billion of three- and six-month bills. The bid-to- cover ratio, which compares total bids with the amount sold, was more than 50 percent above the average of the past three months, according to Stone & McCarthy Research Associates. The ratio for the three-month auction was 4.16, compared with an average of 2.83.
Foreigners Move In
Asian investors bought at least 34 percent of the Freddie Mac debt sold yesterday, while European buyers purchased 27 percent, the most for two-year notes in more than a year, according to Nancy Vanden Houten, an analyst at Stone & McCarthy in Skillman, New Jersey.
Net foreign purchases of Fannie Mae, Freddie Mac, and other so-called agency debt and agency mortgage-backed securities, rose to $24.2 billion in May from $15.3 billion in April, Treasury said this week.
The senior debt of Fannie Mae and Freddie Mac is rated AAA because of its implied guarantee by the U.S. government, making it attractive to central banks, pension funds and insurance companies seeking low-risk investments.
Asian banks and insurance companies own about $800 billion of the companies' debt, including $200 billion held by Japan and $376 billion by China, Moody's Investors Service said in a report yesterday, citing the U.S. Treasury.
`Miniscule' Default Risk
Moody's said Fannie Mae and Freddie Mac pose ``little risk'' to Asian banks and insurance companies that hold the securities because any loss in value would be ``limited and temporary.'' The ``risk of default is miniscule, in line with the Aaa ratings,'' Deborah Schuler, a Moody's senior vice president, wrote in a report released yesterday.
While the company paid its highest yields compared with Treasuries to sell the notes and bills, the spreads reflect increases across the market, rather than investors avoiding the company, Bitsberger said.
The average spread on corporate bonds climbed to 297 basis points yesterday, compared with 203 basis points on Dec. 31, according to Merrill's U.S. Corporate Master index. Spreads on mortgage-backed securities guaranteed by U.S. agency Ginnie Mae have risen to 134 basis points from 79 basis points, according to Merrill's GNMA Master index.
``When you say we're wider, I can say we've far outperformed any other type of bond asset classes,'' Bitsberger said. ``I think the past year, where we've been in a flight to quality environment, I'd be surprised if we weren't wider to Treasuries.''
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.
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