Freddie Mac issues in euros
September saw the launch of a new programme of bond issuance in Europe from one of the well-known US federal mortgage agencies, Freddie Mac (the Federal Home Loan Mortgage Corporation). What makes this new series rather different from others is the fact that the paper is actually denominated in euros, a first for any US agency. In parallel with its US dollar Reference Note Programme launched in 1998, Freddie Mac has committed to issue E20bn a year in this new programme in quarterly amounts of at least E5bn.
2000 has not been a good year for agency paper in the US, with spreads widening for several reasons. Although credit spreads throughout the world, not just in the US, have been widening in a general flight to quality, for agencies the main negative factor was political.
A congressional committee, led by Republican Richard Baker, tabled a motion challenging what it saw as preferential treatment of the agencies. These privileges include the fact that both Freddie Mac and Fannie Mae are exempt from state and local taxes, although they are both semi-private companies with shares listed on the New York Stock Exchange. Baker argued that the agencies were, in effect, costing taxpayers and ordinary householders millions of dollars in lost taxes to the state. These ‘troubles’ had helped push the spread over US Treasuries out from 50 basis points at the start of the year, to just over 120bps by May.
In spite of these political discomforts back home, the euro issuance was well handled and successfully placed. According to Norbert Meisner of co-lead manager Deutsche Bank, 90% of the paper was placed domestically to continental European institutions such as insurance companies and pension funds.
There appears to be a refreshingly wide spectrum of investor opinion as to the prospects of the issue. For Pictet’s Rajeev DeMello, the response is very positive, “I think it would be fair to describe us as ‘enthusiastic investors’ in this paper. The initial marketing roadshow emphasised the liquidity aspect, and I would have to agree that it is working. The Freddie Mac euro issue is now the most liquid non-government, swap-correlated product we have in our market right now.” As for those political risks, DeMello argues: “Yes, there was a perceived political risk at the time of the launch, but we heard what the Freddie Mac guys themselves had to say and were not too concerned. With the election looming, Baker’s position would be weakened anyway.”
DeMello’s faith was rewarded when, at the end of October, an agreement between the agencies and the committee was reached. Investors were very relieved to see that there was to be no fundamental difference to the status of the two agencies.
Peter Bonekamp at Dutch group Insinger is another happy investor. He goes on, “Our primary goal in holding this euro issue was that Freddie Mac priced it relatively cheaply because their name was relatively unknown among European investors and they had not issued in euros before. I would agree that it is one of the most liquid non-government 10-year issues in the market at this time.”
For the sceptics, however, the Freddie Mac euro issuance was not convincing enough. Paolo Bernardelli, head of fixed income at San Paolo IMI, explains why he did not invest: “It was a question of relative value and liquidity. I believe the bond was issued rich against the equivalent dollar issues.” Bernardelli then goes on to argue that it is too simplistic to compare the US market with the European one, saying: “In the US, investors who want to diversify out of the expensive government bond market are rewarded in the agency market which is very liquid. The spreads in the US_market are wide enough to cushion against the risk of further widening.”
Bernardelli suggests that, within the euro area, investors can diversify into cheaper government markets and also the Jumbo Pfandbriefe market that is big enough to ensure the liquidity we need as investors. He adds: “Whilst I agree that, at the moment, liquidity for this Freddie Mac issue is quite good – the dealers are currently making a 0.04 point market – I fear this will change as soon as it loses its benchmark status. Their official commitment is for a 0.1point spread.”
The Freddie Mac is trading cheaper to the government benchmark than at its issue, but has not done any worse than all the other non-government euro bonds.
Meisner remains undaunted. He explains, “The issue cheapened on the Baker Committee news, but when that threat went away, the bonds pulled back the lost ground.” Look at other issuers, they have bonds along the whole curve, and that makes it much easier for really active spread trading because there can be a decent repo market. The same can happen with the Freddie Mac programme. Freddie Mac have got in early, and they are filling a hole. Who’s to say that they can’t fulfil the same role as substitute issuers for government here, as they are already perceived to be doing in the US?”