Follow PIMCO into Fannie and Freddie Bonds
Sep 5th, 2008 | By Eric Roseman | Category: Featured, Financial NewsLast month, several Chinese banks moved to reduce their exposure to toxic US mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). They sold Fannie and Freddie debt.
The Chinese were dead wrong, says Eric Roseman.
The US government has implicitly guaranteed the safety of Fannie and Freddie. More important, Fannie and Freddie have some of the best ever spreads versus Treasury bonds.
Already this year, Fannie and Freddie bonds have jumped 3%.
Eric says it’s time to follow bond billionaire Bill Gross’s PIMCO into Fannie and Freddie bonds.
This from The Sovereign Society:
If anything, now is the time to buy, not sell, Fannie and Freddie debt. PIMCO is probably the savviest bond investor in the world with more than US$800 billion in assets. Recently, PIMCO has been aggressively accumulating mortgage-backed securities.
Last week, PIMCO announced they may be creating a private fund to buy the highest quality mortgage-backed securities.
China’s recent paring of U.S. GSE (Government Sponsored Enterprises) holdings is not significant considering all positions are valued at less than US$13 billion.
Both mortgage lenders have issued hundreds of billions of dollars in fixed-income securities over the years. China’s slicing of US$23.3 billion on December 31 to US$12.7 billion as of August 25 won’t affect GSE pricing in a big way. The figure is not big enough.
Global central banks - including several Asian and Middle Eastern banks - have a bad track record making investments lately.
Sovereign Wealth Funds, or SWFs, have been aggressively buying distressed U.S. and European financial services companies since the sub-prime market exploded in August 2007. These guys have already lost billions on paper since last fall.
Central banks are also notorious for making the worst investment decisions at the wrong time. Over the last decade a host of central banks have dumped gold just as prices bottomed in the late 1990s.
Are Chinese banks right to reduce GSE holdings this summer? My guess is probably not. I’ll bet on PIMCO.
Source: Freddie and Fannie May Be Debt-Ridden, But Their Bonds Are Worth Holding
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Eric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.
