Risk premiums on federal agency debt issued by Freddie Mac and Fannie Mae jumped on Friday after the former reported a record loss, forcing it to draw on Treasury funding. Yield spreads on agency debt rose toward record highs of early last week also after the Treasury refocused its bailout plan to bank equity from debt purchases.
Taking bad assets such as subprime bonds off bank balance sheets would have helped better quality bonds, such as agencies, by extension. Freddie Mac reported a $25.3 billion quarterly loss on Friday and conceded through write-downs that it will not return to profitability soon. Writing down tax-deferred assets left the company with a negative net worth, in which liabilities exceed its assets, requiring it to tap the Treasury backstop.
Fannie Mae earlier in the week reported a record $29 billion loss for the quarter, and said it may have to use the Treasury credit by year-end. The quarterly results disturbed investors in the $3 trillion market for agency securities since the future of government support is uncertain once Fannie Mae and Freddie Mac emerge from conservatorship.
"The market is thinking over this next presidential term, (Fannie Mae and Freddie Mac) could be made private or could be one big government agency that handles mortgages," said Dan Tranchita, a Milwaukee, Wisconsin-based manager of the AHA Full Maturity Fund. "Without clarity, people will push spreads out because a risk premium on something that becomes private should be significant." And for most companies, negative equity "means zero on your bonds," he added.
Yield spread premiums on five-year debt of Freddie Mac rose about 4 basis points on Friday to 1.35 percentage points more than Treasury notes, the widest since November 5. On the week, the spread widened 16 basis points. Two-year Freddie Mac spreads ballooned to 1.54 percentage points on Friday from 1.41 points on Thursday and 1.24 points a week ago. They hit a record 167 basis points on October 28.