Posted on 07/28/2003 8:53:59 AM PDT by AdamSelene235
NEW YORK -(Dow Jones)- Agency debt securities seem to be quickly losing their overseas appeal, with Asian interest in the bonds dropping substantially in recent weeks and the European Central Bank reported to be unloading its holdings.
The ECB is said to be selling all (!!!) the bonds it owns by housing finance companies Freddie Mac and Fannie Mae and is advising its member central banks to do same, according to a report on Bloomberg News.
"If the news is true, it is obviously a negative for agencies, but I don't think it's as bad as people might think because the European central banks have not been huge sponsors of the agency market," said Mukul Chadda, agency strategist at Lehman Brothers.
Nevertheless, the news is moving the market Monday morning, and yield margins on agency debt over Treasurys are wider across the yield curve.
Foreign investors have been selling agency debt since early June, when Freddie Mac reshuffled its senior management and several investigations were launched into the housing-finance company's accounting procedures.
Agency debt held in custody at the Federal Reserve on behalf of foreign central banks has fallen to $183.2 billion in the week ending July 23 from $ 188.9 billion in the week ending June 11.
However, Chadda noted that that figure also includes mortgage-backed securities issued by the agencies.
Moreover, the data show that foreign central banks have also been selling Treasury holdings in recent weeks, which declined to $753.7 billion in the latest week, down $3.88 billion from the previous week.
The music stops when the Chinese/Japanese/etc. stop buying our debt.
Depends on how much your payment is relative to your income, and how secure that income is.
I'm sure many, many, homeowners will be able to weather the storm.
But many will also not. In particular the interest-only and minimal down payment borrowers.
Some people are predicting deflation, others stagflation. A possible strategy for financially surviving either scenario would be to purchase a home that is affordable under traditional measures, rather than the crazily lax lending standards of today.
Oh well, only another 1% to go until they have to warm up the helicopters, right?
I can't imagine home prices will fall by more than 50% or unemployment will go beyond 20%.
Is that a problem?
When the accounting scandal at Freddie Mac (FRE:NYSE) began making headlines earlier this summer, the mortgage finance firm's two biggest investors ran for the hills.
The most recent regulatory filings reveal that Fidelity, the nation's biggest mutual fund company, sold 26.3 million shares of Freddie in the second quarter, roughly half of its Freddie holdings. Fidelity began the quarter as the largest investor in the government-sponsored company, but has dropped to second place, according to institutional investor information compiled by the Nasdaq Stock Market Web site.
It was during the second quarter that Freddie revealed it had pushed out three top executives because of problems with its accounting practices. The first two weeks of June saw some of the most active trading in Freddie shares in years.
Abandon Ship
But Fidelity wasn't the only top-10 institutional holder to bail during the accounting scandal at the nation's second-biggest mortgage buyer. Other big sellers in the most recent quarter included French financial services conglomerate AXA (AXA:NYSE ADR) , Oppenheimer Funds and investment management firm Massachusetts Financial Services.
AXA sold so many shares in the quarter -- 20.8 million, or 64% of its holdings -- that it no longer ranks as one of Freddie's top 10 investors. The French firm now ranks 12th, falling from second place in the previous quarter.
By contrast, Fidelity and AXA still rank as the largest and third-largest owners of Fannie Mae (FNM:NYSE) , a close sibling of Freddie and the nation's largest mortgage buyer.
With all of the selling by Fidelity and AXA, Barclays Bank leapfrogged from third place to become Freddie's largest shareholder, even though the bank lightened its portfolio of about 1.2 million shares. (Barclays might be limited in its ability to sell Freddie shares because much of its money is tied up in index funds.)
Officials at Fidelity and AXA both declined to comment on the reasons their funds bolted out of Freddie. But it's a good bet that much of the selling occurred after the accounting scandal began making headlines, and after regulators and federal prosecutors opened investigations into the matter.
Fast and Furious
Indeed, on the day of the management shake-up at Freddie, the stock dropped 15%, to $50 a share, with some 61 million shares changing hands -- eight times the normal daily trading volume.
It's not known whether Fidelity, AXA, or the other big institutions that sold Freddie shares later bought shares at lower levels. But Freddie's stock has remained stuck in the mud since the accounting scandal broke, and daily trading activity has remained a tad below average.
That may be an indication that many institutional investors, who own 80% of the finance firm's outstanding shares, remain ambivalent about Freddie's prospects. In fact, two days after regulators forced Freddie's board to oust Chief Executive Gregory Parseghian because of his role in the accounting scandal, Freddie's stock is again treading water at around $51 a share.
There's a good reason for investors to sit tight, because Freddie's problems aren't over.
Next month the company will report the results of its much-anticipated restatement, which is intended to rectify its prior accounting errors. The company has said the restatement could add anywhere from $1.5 billion to $4.5 billion to its past earnings, but also reduce future earnings.
Shenanigans
Most of the accounting games at Freddie stemmed from an attempt by management to limit the impact of its large derivatives portfolio on its earnings. Rather than record large gains on those derivatives transactions in a short time frame, Freddie's managers tried to spread out those revenue gains over several years.
Still, some institutions, including Goldman Sachs (GS:NYSE) , Pacific Financial Research and Putnam Investments, were buying Freddie shares even as its troubles were mounting.
Far and away the most bullish institutional investor during the last quarter was Gordy Crawford's mammoth Capital Research & Management investment company. The fund added 14.5 million shares, a 272% increase in its holdings.
It would appear that Crawford, who invests heavily in media companies, is making a big bet in Freddie's ability to shake off all of the negative headlines this summer.
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