Fannie/Freddie Rally: A Product of Fed Intervention

August 28, 2008

Dan Schmeidler submits:

This week’s debt offering by Fannie (FNM) and Freddie (FRE) sparked an intense rally in the stocks of the two companies.

There is not much good happening right now in the business of Fannie and Freddie. They have sold debt before, like in their better days. In fact, investors who picked up Fannie and Freddie papers this week would have been foolish to walk away from three-month notes yielding 2.58 per cent. Mind you, these instruments have some kind of government guarantee attached to them that (from what these investors like to believe) must cover the near full percentage point over Treasuries. I am wondering if that auction raised an eyebrow or two at the Treasury Department, or at least, raised some concerns regarding the Treasury’s own debt offering. But the Fed doesn’t seem to want to take action. This gives investors the perception that the markets will have to play themselves out.

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