The large number of redemptions of callable bonds in 2001 has created a gap in the medium-term note (MTN) market, fuelling demand for more issues. Radwanski added that much of the current interest being shown in callable agency debt has come from Asian investors that are becoming more familiar with this type of product.
Beth Hammack, vice-president, head of agency trading and syndicate at Goldman Sachs, who along with Merrill Lynch and Bear Stearns underwrote the issue, said she “would not be surprised if Freddie Mac did another one in two months”. The January issue was significantly oversubscribed.
Freddie Mac benefits from issuing callable bonds, as it hedges out risk assumed through its effective short-call option position with mortgage holders. Radwanski claimed such bonds also add convexity – the relationship between bond prices and bond yields – to its overall portfolio.
Unlike rival agency Fannie Mae, which issues monthly callable bonds under its callable benchmark note programme, Freddie Mac has no plans to revive the callable reference notes programme which it abandoned in September 1999. “We were approached by the banks on a reverse enquiry basis, who made a good pitch to us,” said Radwanski. But he stressed the agency would only continue to issue such notes to meet investor demand.
A spokesman at Fannie Mae said this was a very good time to be looking at callables. But the agency has not entered into any ad-hoc issues of this size. Its largest issue was for $1.5 billion under the benchmark note programme.