The Fed's massive balance sheet expansion is meant to hold down long-term rates. The central bank has also kept long-term rates at record lows for over four years, keeping the federal funds rate in a range of zero to 0.25% since late 2008. The market always anticipates changes in monetary policy, and has pushed the yield on 10-Year U.S. Treasury securities to roughly 2.13% Tuesday from 1.70% at the end of April. One of the more negative recent economic reports came from the Institute for Supply Management, which on Monday said its ISM manufacturing survey for May fell to 49 from 50.7 in April. This was the first time the figure was below 50, indicating contraction, since November. In a note to clients on Tuesday, UBS economist Maury Harris wrote that "the latest manufacturing ISM data continued to be inconsistent with generally lower jobless claims and higher consumer confidence. While this inconsistency means we are not yet very worried about the US economy, there are enough ambiguity and crosscurrents in recent data reports to likely keep the Fed from dialing back on
Fannie and FreddieCommon shares of Fannie Mae ( FNMA) and Freddie Mac ( FMCC) pulled back on Tuesday, following two days of very strong gains. Fannie's shares were down 11.5% to close at $2.24, while Freddie's shares were down 11% to close at $2.18. Fannie and Freddie are known as the government-sponsored enterprises, or GSEs, and hold roughly $5.2 trillion in mortgage loans and mortgage-backed securities. The GSEs were taken under government conservatorship at the height of the financial crisis in 2008, but remain crucial to the U.S housing market, purchasing roughly 90% of newly originated mortgage loans in the United States. The U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares, for bailout assistance provided to the companies. With both GSEs now profitable, they have paid or announced dividends to the government totaling $131.6 billion. But no matter how profitable the GSEs get, they aren't allowed to repurchase any of the government-held preferred shares. But investors holding GSE common shares and junior preferred shares are expecting some sort of political settlement that will allow Fannie and Freddie eventually to repay the government and go on operating, or a dissolution of the GSEs that includes an eventual payout to investors.
Bloomberg on Tuesday reported that Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.) are drafting a bill to dissolve Fannie and Freddie over a period of five years, while having the U.S. Treasury take over the GSE's mortgage loan guarantees. The GSEs would, in part, be replaced by a new government agency. While it is still only a draft proposal, the Corker-Warner bill appears to be a political watershed, because it will give consideration to junior preferred shareholder of the GSEs, as well as to their common shareholders. In a note to clients on Tuesday, FBR analyst Edward Mills wrote "while this legislation faces significant hurdles and GSE reform is still a long ways off, this legislation is significant as it marks the most constructive bipartisan effort yet to move Fannie and Freddie beyond conservatorship."
-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn