GSE Shares, MBS Prices Ride Rollercoaster; Whither Thou, Discount Window?

Shares in Fannie Mae (FNM) and Freddie Mac (FRE) recovered late Friday somewhat from an incredible downswing that had reached as far as 50 percent off early on Friday, after Treasury secretary Henry Paulson stressed that no plans to bail out either GSE were imminent, and reports circulated that Fed chief Ben Barnanke told Freddie CEO Richard Syron that the two enterprises could access the discount window. In a press conference Friday, ahead of a likely key vote on a housing package, Sen. Chris Dodd (D-CT) said that “this is not a time to be panicking …. [Fannie and Freddie] and viable, strong institutions.” Dodd’s remarks also suggested that the GSEs could access a credit line from the Fed, as an option. Reuters then reported late Friday afternoon on the alleged Bernanke comments. A Federal Reserve official shot down the report after market close Friday, saying “that here have been no discussions with the GSEs about access to the discount window,” according to the Wall Street Journal. Nonetheless, shares in both GSEs jumped off their incredible lows on the news: Freddie closed Friday at $7.67, down a seemingly more reasonable 4.12 percent. Fannie’s shares fared comparatively worse at $10.16, down 23.03 percent. But both closes represent a step back from the abyss. While the news of possible Fed help led both GSEs to recover somewhat, none of the news was good for Treasuries, which were already selling off before the news broke. According to data provided by Bloomberg, the yield on a 10-year Treasury note rose to 3.94 percent on Friday, a jump of 134 basis points from Thursday’s close (note: yields move in an opposite direction to bond prices). But perhaps the single largest whipsaw of the day was observed in the agency MBS markets — which see-sawed from a huge jump in prices early in the morning into a steep drop in prices by the afternoon (which means MBS yields, a strong indicator of mortgage rates, whipsawed in the opposite direction). Prices on Fannie Mae’s current-coupon, 30-year fixed-rate bonds had soared Friday morning, up 31 basis points to $101.53 — but by Friday afternoon, the same MBS trade was at $100.66, off 56 basis points from Friday’s open. That’s a 88 basis point swing in MBS prices spanning two completely different directions, within one day. Such a huge swing in MBS prices and associated yields likely led mortgage rates on a rollercoaster ride reminiscent of the wild swings observed daily during March’s last bout of financial market turmoil, with lenders scrambling to make intra-day updates to their rate sheets in an effort to keep up. It should make for an interesting week next week; what sort of investor mood shows up on Monday at this point is pretty much anyone’s guess, especially with the Fed’s formal denial of the discount window rumor. But some things have become crystal clear throughout the rout: chief among them is that there are limits to investor’s willingness to believe that the GSEs can backstop a flailing U.S. housing and mortgage market. So too, has it been made clearer that the nation’s housing woes have yet to work out all of the financial jitters. And just think: earnings season begins in earnest next week. Disclosure: The author was long FRE and held no other positions of relevance when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.