By Prabha Natarajan Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Agency investors cheered the Federal Deposit Insurance Corp.'s decision to put the risk weighting of guaranteed bank debt on equal footing with that of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE).
But the FDIC's program still gives bank debt, which will be guaranteed for up to three years, a more explicit, and therefore stronger guarantee than the backing it gives agency debt.
Risk premiums on Fannie and Freddie debt have soared since the FDIC first unveiled the program last month as the bank debt would directly compete with agency debt. Friday, risk premiums tightened, but as the result of a correction to this week's volatility rather than in response to the FDIC ruling.
The FDIC ruled at its board meeting Friday that it would keep the risk weighting on the bank debt at 20%, the same as the existing weighting on Fannie and Freddie debt.
"It seems like they were trying to preserve Fannie and Freddie debt," said Mark Noble, head of the agency desk at MF Global Inc.
However, the key difference to investors is likely to be the extent of the government guarantee.
The FDIC agreed to modify the rule to provide for timely payment of principal and interest upon a payment default. The change addresses concerns that the guarantee originally would be triggered only by a bankruptcy or failure rather than by a payment default.
Both the Treasury Department and the government-sponsored enterprises' regulator have been hesitant to explicitly guarantee agency debt with the full backing of the U.S. government.
Meanwhile, market participants expect the FDIC guarantee of bank debt to carry the full faith of the U.S. government.
The changes create a more formidable competitor for agency debt, said Rajiv Setia, an agency strategist at Barclays Capital, in a note.
He expects $300 billion of fresh supply to hit the markets, mostly next year.
"That amount of issuance is a function of what spread levels bank debt can be issued at - if spreads are too wide, issuance will be biased lower," he said.
The FDIC is expected to explain some of the nitty gritty details of its guarantee program to investors and issuers later Friday, which may pave the way for new issuance as early as Monday.
-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@dowjones.com
(END) Dow Jones Newswires
November 21, 2008 17:47 ET (22:47 GMT)

Publié le 21 novembre 2008 Copyright © 2008 Dowjones