Tuesday, September 2, 2008

Fannie and Freddie debt take a beating overseas because of government uncertainty

The Bank of China has cut their debt exposure in Freddie and Fannie by 29 percent or $3.14 billion. They have cut their MBS exposure by 22 percent in the past two months. The reason is simple, uncertainty about the risks with these agencies. This has bee nthe case across all fixed income investors but the Chinese have been such large buyers of the debt so their actions have a big impact on spreads. This is at the same time that the dollar is seeing a rally.

The cause is uncertainty about the future of these GSE. Should they be private companies or should they be taken over by the government? Because no one is making the difficult calls, these entities muddle through and continue to add to the already high market uncertainty. If Fannie and Freddie cannot get cheap funding then they cannot meet their mission of providing cheap housing finance. The role of government is to minimize uncertainty and not follow policies that create it.

If the rally for the dollar is to continue, there has to be less uncertainty about the financial stability of the US debt markets

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