Buzz and Banter
Brian is in New York and stopped by the desk for a quick visit. As we were watching the market open this morning, we got to talking about two of our favorites, Fannie Mae(FNM:NYSE) and Freddie Mac(FRE:NYSE). FNM announced this morning that their duration risk had widened from minus one month to plus six months.
This in itself does not tell us much. We can view the gap as the "delta" or current exposure, but it tells us nothing of the "cost", as dictated by the volatility of the bond market, of getting this risk down. It also does not tell us what their "gamma" or future risk is to further moves in the bond market. What it does tell us is that they are working hard to keep the current level of their duration risk from growing. This is not necessarily a good thing. Because the "cost" or volatility of the bond market is higher, it is costing these companies more to manage their duration risk. That in turn is causing other market participants to do the same, feeding the growing volatility of the bonds even more.
FNM and FRE issued callable debt last spring, in lieu of cheaper non-callable debt, in order to try to mitigate some of this cost (it is closer in nature to their assets). This debt has significantly fallen in value as the market has realized the nature of the problem: most of the loss has been due to a rise in rates, but on the margin, callable debt is hurt more than non-callable by an increase in the volatility of bonds.
All this is also having the effect of pushing swap spreads out: agency spreads went from 8 basis points tighter on the day when Brian walked in to 3 basis points wider while we were having coffee. This is an enormous move in such a short time; FNM stock price went from up .40 on the day to -1.35 currently. We continue to expect higher volatility than normal in these stocks.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter