The Cusip number is 912795LF6 Measure of Fannie Maes Risk Widens on Home Refinancings key measure of interest-rate risk at Fannie Mae widened sharply last month, boosting part of the bond marketbut raising new questions about the effects of the home-refinancing boom on Fannies own finances. In its monthly release of financial data, the giant government-sponsored mortgage company acknowledged that what is known as the duration gap between its mortgage assets and debt liabilities ended August at the highest level the company has ever reported publicly, reflecting the recent sharp drop in mortgage rates. But the company said it can handle the added risk, and its profit projections remain the same. Nevertheless, the disclosure somewhat rattled Fannie investors. As of 4 p.m. in New York Stock Exchange composite trading Monday, Fannie Mae shares fell $1.72 to $70.98 each. The disclosure creates a general level of concern when you see a huge financial institution reporting what seems to be a mis-hedging of their assets and liabilities, says Robert Young, a mortgage analyst at Salomon Smith Barney. It looks like a pretty sizable gap. Fannie Maes current predicament is related to the recent refinancing boom. With mortgage rates at their lowest levels in a generation, more borrowers are paying off their mortgages early and taking out new ones with lower rates. When that happens, Fannie replaces those mortgages with new loans that could have lower interest rates -- creating a possible mismatch between the mortgages it now owns and the debt on its books. The duration gap is one way the company measures its success in matching its mortgage assets and its liabilities. The gap swung from negative nine months in July to negative 14 months in August. That doesnt mean that the company is in trouble. But it does mean Fannie Maes huge $747 billion loan portfolio has greater exposure to a sudden shift in interest rates. Fannie Mae likes to have the duration of their assets and liabilities more closely matched; its stated target is to maintain a duration gap of within plus or minus six months. [Graph]] Bond-market investors care about the disclosure because it suggests Fannie Mae will have to take steps to get its assets and liabilities back in line, with possible implications for the rest of the bond market. Treasury prices rose Monday, in part on expectations that Fannie Mae might soon become a big buyer of longer-dated Treasury debt in a move to better hedge its portfolio. At 4 p.m. EDT, the 30-year Treasury bond rose 6/32, or $1.875 per $1,000 invested, to 109 21/32. The yield, which moves inversely to price, fell to 4.751%. Meanwhile, after rising for most of the day, the 10-year Treasury note ended down 1/32, to 103 26/32, yielding 3.904%. The news pressured the 10- and 30-year Treasury yields to new lows for the year -- about 3.85% and 4.73%, respectively -- earlier in the session. With interest rates falling consistently during the past six months, some investors are closely following interest-rate-related disclosures from large financial institutions, because changes in rates can greatly affect their earnings. Sharply shifting interest rates played a role in the near collapse of Long-Term Capital Management, the massive hedge fund that needed a bailout from a number of major Wall Street firms in 1998 to keep the fund afloat and help protect the global financial system. Like its smaller sibling Freddie Mac, Fannie Mae makes much of its money by issuing debt and thenusing that capital to buy mortgages from lenders to hold in its portfolio. The company pockets the difference between the interest it pays to borrow and the interest it collects on the loans it owns. But sudden shifts in interest rates can turn that strategy upside down. In a worst-case scenario, the company could have a mismatch between its assets and liabilities that causes it to lose money if interest rates suddenly move in an unfavorable direction. That is what happened during the 1980s, when the company at one point was losing $1 million a day and was technically insolvent. Today, Fannie Mae is far more sophisticated, and it more effectively manages its interest-rate risk through instruments such as callable debt and derivatives. The duration gap could lead to more worries if interest rates stay low for an extremely long period of time. But for now, says Kevin Jackson, a mortgage-bond strategist at RBC Dain Rauscher in Chicago, I dont think [Fannie Mae is] in any trouble. He and others noted that Fannie Mae has a wide variety of options at its disposal to bring its portfolio back into line. It could issue more shorter-term debt. It could reconfigure its balance of derivatives. It could also more aggressively buy long-term mortgages or Treasurys to add duration to its portfolio, though buying more Treasurys could roil the bond market by driving down Treasury yields. That could in turn send mortgage rates even lower, resulting in more refinancings. Fannie Mae said it isnt a big buyer of Treasurys. Fannie Mae said it isnt unusual for the companys duration gap to swing outside of its target range, especially during a refinancing boom. The company said in a statement that it intends to rebalance its portfolio quickly, but in a manner and at a pace that does not put undue demands on the market. A company spokeswoman added that any negative impact from the large duration gap is at least partially offset by the fact that the refinancing boom has created more loans than usual for the company to buy. Last year, the company reported record earnings despite a large refinancing boom and a temporary jump in its duration gap. Although Freddie Mac measures its duration gap differently than Fannie Mae, rendering comparisons difficult, a company spokeswoman said Freddie Macs duration gap is less than one month. Treasury Securities The weekly Treasury-bill auction came in stronger than expected, with the new three-month bills yielding 1.66%, compared with 1.71% shortly before the auction, and the new six-month bills yielding 1.64% versus 1.69%. Bid-to-cover ratios were a robust 2.10 for the three-month issue and 2.58 for the six-month. [Graph] While it had no market impact, U.S. Treasury Secretary Paul ONeill reiterated his forecast for a return to healthy economic growth by year end in a speech in Portland, Maine. I am confident that we will return to 3% to 3.5% growth rates by the end of this year and that growth will create jobs and renew our prosperity, Mr. ONeill said before the Portland Chamber of Commerce. Asset-Backed Securities The asset-backed-securities market experienced an unprecedented number of downgrades during the first half of the year as corporations and finance companies coped with a weak economy -- a trend likely to persist in the short term. So said Moodys Investors Service in a report released Monday. The rating agency said there were 502 downgrades and just eight upgrades for the period. The number of downgrades accounted for a whopping 37% of the total downgrades since the markets inception in 1985, Moodys said. Prior to 2002, the greatest number of downgrades for a six-month period was 152 for the second half of 2001, Moodys said. About 80% of the downgrades came from collateralized debt obligations, leveraged pools of corporate debt securities funded via the issuance of variously subordinated and rated tranches of debt. Their performance is closely linked to credit quality of corporate bonds and loans, said Julia Tung, a Moodys analyst and author of the report. These downgrades were generally associated with deterioration in the quality of primarily U.S. high-yield bond or syndicated-loan collateral pools, Ms. Tung said in the report. However, non-CDO ABS also saw a record 102 downgrades for the period, outpacing the prior high of 98 reached during the first half of 2000. The increasing number of downgrades in non-CDO sectors is troublesome for a market that is still maturing. This is the first real test of the mature ABS market, said David Heike, an ABS analyst at Lehman Brothers in New York. Treasury Offers $18 Billion Four-Week Bills The Treasury plans to pay down $8 billion on the public debt with the sale Tuesday of about $18 billion in short-term bills. Maturing bills outstanding total $26 billion. The sale amount is unchanged from last weeks auction, when the Treasury sold $18 billion in four-week bills. The four-week bills will mature Oct. 17, 2002. The Cusip number is 912795LF6. Noncompetitive tenders for the bills, available in minimum $1,000 denominations, must be received by noon EDT. Competitive tenders for the bills must be received by 1 p.m. EDT. Auction Results Here are the details of Mondays auction by the Treasury of 13-week and 26-week bills. All bids are awarded at a single price at the market-clearing yield. Rates are determined by the difference between that price and the face value. 13-Week 26-Week Applications $33,604,388,000 $33,571,925,000 Accepted bids $16,000,263,000 $13,000,043,000 Accepted noncomp $1,398,406,000 $1,000,500,000 Accepted frgn non $125,000,000 $0 Auction price (Rate) 99.580 (1.660%) 99.171 (1.640%) Coupon equivalent 1.692% 1.676% Bids at market yield 95.89% 46.90% Cusip number 912795LQ2 912795MD0 Both issues are dated Sept. 19, 2002. The 13-week bills mature Dec. 19, 2002, and the 26-week bills mature March 20, 2003. -- Michael Mackenzie and Joy C. Shaw contributed to this article. online.wsj/article/0,,SB1032191547714755835,00.html
Posted on: Fri, 05 Dec 2014 08:11:14 +0000