Thursday, July 14, 2005

Freddie Mac Releases Reference Notes Securities


McLean, VA – Freddie Mac (NYSE: FRE) announced today that it priced its new 4.00% $3 billion two-year USD Reference Notes® security due on August 17, 2007. The issue, CUSIP number 3134A4VD3, was priced at 99.967 to yield 4.018%, or 21.0 basis points more than two-year U.S. Treasury Notes.

Freddie Mac also announced that it priced its new 4.375% $4 billion 10-year USD Reference Notes security due on July 17, 2015. The issue, CUSIP number 3134A4VC5, was priced at 99.327 to yield 4.459%, or 33.5 basis points more than 10-year U.S. Treasury Notes. Both Reference Notes securities issues will settle on July 14, 2005.

Including today's new offerings, Freddie Mac has issued $26 billion of Reference Notes securities during 2005. Since the beginning of the year, approximately $23 billion of the company's Reference Notes securities have matured, leaving approximately $214 billion in Reference Notes and Reference Bonds® securities outstanding.

What does this all mean? What insights can we draw from this information? Here is the key line " The issue, CUSIP number 3134A4VD3, was priced at 99.967 to yield 4.018%, or 21.0 basis points more than two-year U.S. Treasury Notes" Why is this? It is at least partially explained by the extra risk associated with these Reference Notes.

Note: I am no expert on the bond market, so if anyone else has more insights please post a comment


  1. Any fixed rate instrument that is not a US treasury always trade wide (at a premium) to a US treasury, which is highly liquid and presumed to have no credit risk. The 20 bps spread compensates the investors for pre-payment risk and to a lesser extent, credit risk and lesser liquidity.

  2. David, you are correct to state that any fixed rate instrument will trade wider than the US treasury, including a Freddie Mac Reference Note. The bond in question though, has no "prepayment risk" since it is not callable (and not an Mortgage Backed Security"; The reason it trades 20 basis points wider than the treasury is two fold:

    1. Credit risk: Freddie Mac, Fannie Mae, and a few other "US Agency" bonds have the "implied credit backing of the US Treasury, but not the full fledged backing. The only Agency that does is Ginnie Mae.

    2. Liquidity Risk: Since this bond trades a spread to the US Treasury bond, there is a risk that the bond spread will widen if anything happens to Freddie Mac, such as fraudulent accounting, or mistated earnings, such as in 2004, since they are a publicly traded company.