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Fannie, Freddie and callable debt

The Federal Reserve recently paused its interest rate hikes, after two years, and 17 consecutive times of raising rates.

The Fed has been raising rates since June 2004 in an effort to help the economy and curb inflation.

If interest rates kept going up, people would feel like they couldn’t spend as much money, and this would hopefully help to curb inflation. Well everyone is now pretty happy about the Fed’s decision to stop raising rates.

Even mortgage giants Fannie Mae and Freddie Mac are feeling revitalized after their decision last week.

The August 15, 2006 article from The Wall Street Journal, “Fannie, Freddie stimulate investors,” by Allison Bisbey Colter, discusses callable debt and the interest rate environment.

“The Federal Reserve’s decision to pause its rate-increase campaign last week appears to have reinvigorated the market for ‘callable debt’ from Fannie Mae and Freddie Mac by providing investors with some clues about the future direction of interest rates. But the kinds of deals coming to market indicate there is still no consensus on what the direction will be.”

So, as of right now, nobody really knows what is going to happen to the interest rates. Some analysts are being optimistic and thinking that they are going to stay the same and may even get lower.

This recent pause has revitalized investors’ interest in callable debt though, because before they were not investing in those types of bonds because of the volatile environment.

“Callable debt refers to bonds that are redeemable by the issuer before maturity. For the first time in months, Fannie and Freddie are finding a market for longer-term callable debt as some investors conclude that interest rates are likely to stay flat or even fall. But analysts say the heavy issuance of shorter-term of callables with terms as short as one year indicates that there is a portion of the market that is still expecting another rate increase or two.”

Many investors have stayed out of this market because they were uncertain about the future of the interest rates. Were they going up or down?
Now, since the Fed paused, investors are feeling more confident about the market and are willing to invest in these types of bonds.
In general, July was a pretty slow month for Freddie Mac, and Fannie has not released the reports yet.

For Freddie: “The company issued just $2.9 billion in callable debt, down from $11.2 billion in June and $16.6 billion in May, according to information on the company’s website.”

“Fannie and Freddie, which rely heavily on callable debt to hedge the interest-rate risk of their mortgage bond holdings, were also redeeming very few of their outstanding issues. So investors had less money to put back to work. That changed a few weeks ago as investors began to correctly anticipate that the central bank would leave the federal funds rate unchanged this month.”

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