Fed to Buy $600 Billion of GSE Debt

The government announced Tuesday it will spend $600 billion to take on the obligations of Fannie Mae, Freddie Mac and Ginnie Mae in order to reduce borrowing costs for the government-sponsored enterprises (GSEs).

Agency debt has always carried an implicit government guarantee but took on an explicit guarantee after the September takeover of Fannie and Freddie. Still, agency debt has been trading substantially higher than U.S. sovereign debt.

"Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the press release announcing the program said.

After the announcement, the spread narrowed sharply. The spread between 10-year Treasuries and similar Agencies narrowed by 28 basis points but remains at a historically high 132 bps.

Beginning next week, the Federal Reserve will commence buying $100 billion of GSE debt through a series of reverse auctions.

The remaining $500 billion will be used to buy mortgage-backed securities on homes that carry GSE guarantees. The Fed, through asset managers, aims to begin buying the debt by year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters, the Fed said.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008