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US Agenices: Freddie and Fannie aren't sovereign

Foreign investors are buying large amounts of US agency debt as a substitute for treasuries. Fannie Mae and Freddie Mac, both publicly listed companies, are expanding their balance sheets and pushing into new markets. But they are not treasury lookalikes. The implications should concentrate the minds of investors. James Smalhout reports.

Dollar bond investors have a problem. America's budget surpluses are slowly killing off the US treasury market. Foreigners hold over 40% of privately held, marketable US treasury debt. That comes to about 18% of America's GDP. Most projections show that all US treasury debt will fall to much less than that within 10 years. And the White House goes even further. It's saying that America's national debt will vanish by 2015.

Taking up the slack will be the country's GSEs - or government-sponsored enterprises - which will overtake the US treasury for the first time next year in the amount of debt outstanding in the market.

These issuers are confident that their securities provide a valid alternative to US government securities. "There aren't many issuers worldwide," says Peter Horvath, the director of debt securities marketing at Freddie Mac, "that can provide the combination of volume, regularity, frequency and top-quality credit rating to give the market the characteristics that they're going to seek in US treasury

surrogates."

Freddie Mac - the Federal Home Loan Mortgage Corporation - is America's second-largest GSE. Freddie has signalled that it will issue $40 billion of its so-called reference notes this year, with issuance around the middle of each month.

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