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This will mean higher interest rates on mortgage loans in the future based on how I read the article.

What do you say Jim?

I don't think that the higher rate demanded on the bonds is the primary reason the rates will go higher.

Most lenders, including Freddie/Fannie are pricing in risk more aggressively. They are realizing that mortgages are not always as good as treasuries. I also think that many of the bond lenders realize that eventually the Treasury will need to raise rates to fight inflation. I am wondering if the Treasury is keeping rates low right now to make the bond sales easier.

Interesting that Asian purchases are way down.

My understanding is there's a lot of concern from overseas investors about what will happen to their trillions of dollars of Freddie/Fannie securities if those institutions fail. There are two choices, both unpleasant. Either the U.S. government bails out Freddie/Fannie, i.e., we taxpayers pay off those failed private notes, for a staggering sum. Or we let them fail, in which case overseas investors won't buy our securities unless there is a big new risk premium added. The U.S. lives off debt, so in practice we'd have little choice but to pay those higher premiums. That means higher rates for all sorts of loans.

Those are the kind of choices you get when you live in the world's largest debtor nation.

As someone pointed out on CR, the reason for this is obvious. Banks can borrow from the Fed using the TAF facility, using the GSE debt as collateral (well, 97% of the collateral, 3% of their own money). Because the Fed is lending at an artificially low rate to give money to banks (literally, in their words, to replenish their capital), and the GSE's a paying a premium for their increased "risk", the banks are effectively making over 17% on their money doing this.

Moreover, the Treasury won't let the GSE's default on the bonds, because the Fed will be holding a lot of them anyway as a result of this backroom bailout program, and due to the international money inflow considerations, so there's not really any real risk. The international buyers have no access to the free money through the TAF, so less reason for them to buy the GSE debt now.

Banks have a sweet deal with this underhanded bailout program; where do I sign up to get 17% annual return on my money for no risk? The Fed is welcome to replenish my capital through backdoor exchange programs at taxpayer expense too...

The headline is wrong ... this isn't Freddie but but FHLB selling notes.

Thanks GD!

Geez, that's the last straw.

I'm going to get glasses!

NEW YORK (Dow Jones)--Fannie Mae (FNM) auctioned its $2 billion short-term bills Wednesday. It sold its $1 billion three-month bill due Nov. 26 to yield 2.597%. Last week, it sold similar debt to yield 2.516%. The risk premium, or spread between the 3-month bills and comparable Treasurys was 100 basis points, 20 basis points more than was charged last week at a similar auction.

The $1 billion six-month bills due Feb. 25, 2009 were sold to yield 2.912%. Last week, Fannie sold its six-month bill to yield 2.85%. The risk premium on Wednesday's bill was 97 basis points over comparable Treasurys versus 100 basis points over comparable Treasurys last week. On Monday, Freddie Mac (FRE) auctioned $2 billion in reference bills. Its $1 billion 3-month bills due Nov. 24 priced at a yield of 2.597%, 88 basis points over comparable Treasurys and the $1 billion six-month notes due Feb. 23, 2009 sold to yield 2.9%, 91 basis points over comparable Treasurys
(Dow Jones Newswires 10:22 AM ET 08/27/2008)