It’s going to be one of those Fridays.
Shares in Fannie Mae and Freddie Mac nosedived in pre-market trading on Friday, as various news reports stoked investor concerns that the US government was considering nationalising the two mortgage behemoths.
About one hour before the opening bell in New York, Fannie Mae’s share price had fallen as much as 48 per cent to $5.80, while Freddie Mac was down 40 per cent at $4.80.
The possibility of a bailout for the two beleaguered lenders even hurt investor sentiment toward Treasuries, and by extension, the sanctity of the US government’s guarantee.
The perceived risk of the US government defaulting on its debt - as measured by 10-year credit default swap contacts on Treasuries - rose to a near four month high, according to CMA Datavision.
CDS on Treasuries rose 4 basis points to 18bp - just shy of the record 19bp set back in March, when the Fed said it would back JP Morgan’s rescue of Bear Stearns.
Fannie Mae and Freddie Mac have about $5,200bn in outstanding debt, which exceeds the Treasury’s $4,600bn in notes, Bloomberg data show.
Back in April, Standard & Poor’s warned that any move to support Fannie and Freddie would threaten the US government’s triple-A rating.
S&P said the potential costs of propping up the lenders could be as much as 10 per cent of GDP.
But Fannie and Freddie’s own swaps actually tightened on hopes the government would indeed stand behind their debt.
Five-year CDS on both Fannie and Freddie tightened about 12bp to 65bp, according to broker Phoenix Partners Group.
Related links:
US Weighs Takeover of Two Mortgage Giants - NY Times
Fed bail-out of troubled lenders could threaten US credit rating - FT
