Freddie Moves to Capitalize on Low Rates

Freddie Mac plans to repurchase nearly $30 billion of short-term debt as part of a plan to take advantage of tight interest-rate spreads.
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Freddie Mac

(FRE)

plans to repurchase nearly $30 billion of short-term debt and reissue it into longer term securities to reduce liability in coming months and take advantage of tight interest-rate spreads.

The mortgage finance giant, which is mostly owned and operated by the government, outlined plans for a tender offer of 31 types of debt instruments, pricing all of them near par value. The offer relates to nearly $70 billion worth of securities that will come to term from September 2009 through August 2010.

Freddie intends to buy back the short-term paper, then issue additional debt that matures over longer periods, according to Mohit Sudhakar, senior director of debt portfolio management. The move comes as long-term interest rates have declined sharply over the past six months, providing an attractive cost relative to short-term debt.

"At the moment, as markets are healing, the demand for all types of agency debt is phenomenal, and therefore we would like to issue longer term and take advantage of the spread compression that has happened over the last three or six months," said Sudhakar. He later added, "If you could get the same value on short-maturity debt as long-maturity debt, the prudent thing would be to do long maturity."

The firm occasionally makes such deals to limit liabilities on short- and long-term rate differentials. Because it is floating-rate debt that resets frequently, the pricing doesn't usually move very far from par value. The current offer prices range from 99.89 cents on the dollar to $1.03 per dollar, and the median price barely above par.

The last time Freddie made such an offer in dollar currency was 2006, though it made a euro-denominated offer in 2007.