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T+113 Means One Chance in Four Freddie Mac Goes Under

From Across the Curve:

Across the Curve » Blog Archive » Agency Close: Benchmark agency spreads are unchanged in the 2 year sector and 2 basis points tighter in the 5 year and 10 year sector.Freddie Mac was able to fund itself as it successfully placed $3 billion 5 year notes. The issue priced at T+113 and has narrowed by 5 basis points. It is currently 108/106. Notwithstanding the relative success of the Freddie sale the agency market is still a very troubled venue. One analyst notes that central bank demand for the sector has diminished significantly since June....

Some are troubled by the recent statements of Secretary Paulson that he is not eager to use his new powers. Some have extrapolated from his statements that he is only prepared to exercise his powers in an emergency. What constitutes an emergency? Suppose we walk in tomorrow and Freddie or FNMA can not get rolled over in the discount note market. Treasury exercises its powers and the taxpayers have an ownership interest in the GSEs. The central banks are anxious for a resolution or some clarification. On the other hand Paulson would probably be happy if the stocks run close to zero and he never has to spend a penny. As long as they open for business each day he is likely to be a contented former partner of Goldman Sachs...

It is hard to see a bankruptcy of Freddie Mac costing its bondholders more than 1/5 of their capital. That means that risk-neutral investors would have to rate the odds of a Freddie Mac bankruptcy over the next five years at 1/4 or they would be willing to hold five-year Freddie Mac debt at a higher price than they are.

Maybe it's just me. But that seems a very, very high spread...

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