Concerns about the formerly-government sponsored mortgage giants Freddie Mac and Fannie Mae took center stage in the financial markets this week, but initial reporting indicates that money market fund managers continue to have faith in Fannie and Freddie. While short-term debt rates rose, the modest 5-10 basis point jumps in rates indicates that the money markets are far from in a panic mode, and sources tell us that investors continue to view the agencies' debt as money fund-worthy. (See also today's Federal Reserve announcement, "Board grants New York Fed the authority to lend to Fannie Mae and Freddie Mac if necessary" and Treasury's "Paulson Announces GSE Initiatives".)
JPMorgan's Alex Roever writes in his latest "Short-Term Fixed Income" report, "It's also true that money market and other short-term investors are running out of places to put their prodigious portfolios. There are few, if any places to hide. In any case, we see no reason to duck discos, or any other short-dated senior level agency debt. We would continue to be buyers at current levels."
Government agency debt represents the third-largest holding of money market mutual funds (11.6%), following commercial paper (CP) at 25.0% and repurchase agreements (repo) at 19.2%. Freddie Mac and Fannie Mae account for about 20% of all agency issuance, according to estimates, though this debt is also used to back a portion of repo holdings. Thus, money funds likely hold in the range of $340 billion of the over $850 billion in agency discount ("disco") debt, and approximately $70 billion in Fannie and Freddie debt (primarily discount notes).
Saturday's Wall Street Journal discusses the issue in, "Better Debt Than Stock?" The Journal says, "[E]ven as the stock market panicked, investors were more sanguine when it came to Fannie and Freddie's debt. Sound crazy? Actually, it makes perfect sense.... Debt investors, meanwhile, haven't been as worried by the capital conundrum because they remain confident the government will, if necessary, back the companies' liabilities. They are probably right to think that a worst-case scenario would run along the lines of the Bear Stearns bailout: The stock gets creamed, but debtholders are all right."
The agencies continue to hold the highest short-term ratings, though there have been minor signs of weakness in government-only money fund assets. Our Money Fund Intelligence Daily shows Government Institutional Money Funds declining by $858 million on Thursday, though they remain up $2.9 billion over the past week. Overall money fund assets rose $7.04 billion Thursday, and have risen $47.68 billion in the week through July 10.
