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Thursday, September 11, 2008

 

what if...


... we bailed out the GSEs but it didn't work?

Sellers of corporate debt can take some comfort that their bonds don’t share some of the uncertainty of post-bailout agencies, but what are the implications as the GSEs continue to roll over their paper? In this mostly positive story about today’s record bill sale by Fannie Mae, Bloomberg included an obscure paragraph about foreign participation that should really have been written in letters of fire:

Asian investors bought 12 percent of the latest two-year debt issue, as European investors purchased 8 percent, down from 39 percent and 17 percent in the July sale, according to company data. Central banks bought 27 percent, down from 57 percent. …


So on a proportional basis the Asians reduced their participation by over two-thirds and the central banks by over half. That certainly looks significant, and should make tomorrow’s release of FRBNY’s statistics on central bank net holdings of treasuries and agencies most interesting.

We’ve become sensitive to stories about the level of comfort that Asian governments have in agency debt. Today Taiwan put some mild restrictions on the level of exposure to GSE debt of their insurance industry.

In the meantime, there is also the question of confidence in treasuries themselves. One measure of quality seems to be causing some concern. So it’s not just the yield spread between "riskless" treasuries and agencies which is in play, but the absolute yields of both.


the whole point of the exercize, from treasury's view, was to attempt to restore the flow of funds from foreign central banks to the GSEs. if that doesn't work and FCBs are content to buy treasuries (or something else, perhaps not dollar denominated) the outlays and losses to treasury as it attempts to maintain the activity level of FNM/FRE in the secondary market will be even more astronomical than already preordained.

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