ECB Recommends Central Banks Sell U.S. Agency Debt, Person Says
July 28 (Bloomberg) -- The European Central Bank is eliminating its holdings of debt issued by Freddie Mac and Fannie Mae, the two biggest U.S. providers of mortgage financing, and recommended that its national central banks do the same, according to a person who has seen the ECB's recommendation.
The Frankfurt-based central bank, which sets interest rates for the 12 countries sharing the euro, gave its opinion at the last meeting of the 18-member governing council on July 10, said the person who declined to be named. ECB spokeswoman Regina Schueller declined to comment. Officials of the 12 central banks declined to comment.
Freddie Mac is under investigation by the U.S. Securities and Exchange Commission and federal prosecutors after overstating earnings, leading to the ouster of its top three managers. The difference between yields on Freddie Mac notes and comparable U.S. government debt has increased this year as investors perceive Freddie Mac debt to be more risky.
"Some investors will ask themselves: Is this really as safe as I thought it was? And some will say: This is too risky for me," said Louis Hagen, general manager of the Association of German Mortgage Banks in Berlin.
McLean, Virginia-based Freddie Mac said last month it understated profits by as much as $4.5 billion during the past three years as it made errors in applying generally accepted accounting principles in valuing derivatives contracts. Derivatives are financial obligations tied to the value of debt and equity securities, commodities and currencies.
The ECB based its recommendation to the national central banks on credit risk, the person who declined to be identified said.
Freddie, Fannie Decline to Comment
Freddie Mac spokeswoman Heather Sieber declined to comment.
"We do not comment about specific investors," Fannie Mae spokesman Jason Lobo said. ``Our investors are broadly distributed around the world and those investors include central banks.
Fannie Mae and Freddie Mac own or guarantee about 42 percent of the $7 trillion U.S. mortgage market. Fannie Mae's mortgage portfolio is worth about $816 billion, while Freddie Mac controls about $573 billion of mortgages.
The two companies, regulated by the Office of Federal Housing Enterprise Oversight, are known as government-sponsored enterprises. While the U.S. government doesn't guarantee any of their obligations, both Fannie Mae and Freddie Mac have Aaa ratings from Moody's Investors Service and Standard & Poor's.
No ECB Totals on Agency Debt
Freddie Mac notes maturing in January 2013 traded 43.5 basis points more than 10-year Treasuries, widening from 26 basis points before the company announced the management changes, according to J.P. Morgan Securities. Since June 6, the yield spread widened to as much as 44.5 basis points before rebounding back to 33 basis points.
ECB doesn't disclose breakdown of its reserves and spokeswoman Schueller declined to comment on how much U.S. agency debt either the ECB or the 12 national central banks of the nations sharing the euro hold.
The ECB's foreign currency reserves are managed by the euro region's 12 national central banks on the basis of ECB guidelines. The ECB can order the other central banks what to do with its own reserves, while the national central banks have control over their own reserves.
The ECB and the national central banks had combined foreign currency assets of 221.2 billion euros at the end of last week, of which 205.4 billion were claims on residents outside the euro region.
The region's central banks sold 3.075 billion euros in foreign currency reserves in the week ended July 18 that were owed to them by residents outside the euro region, the second- biggest sale in more than a year, according to Bloomberg calculations based on ECB data.
So-called agency debt held in custody for foreign central banks has declined in six of the past seven weeks to $183.25 billion from a record $189.9 billion, according to the Federal Reserve. Foreign central banks sold $585 million in the week ended July 23, the Fed said.
By comparison, foreign central banks' holdings of U.S. Treasury debt declined by $3.88 billion in the latest week to $753.74 billion. Those banks sold $3.27 billion Treasuries in the prior week.
