Freddie Mac Says Demand for Bonds in Asia Is

Freddie Mac, the second-largest source of money for U.S. home loans, said ``strong, steady'' demand among Asian investors will support the mortgage-backed bond market.

``There's strong, steady demand for Freddie Mac securities in this area of the world,'' said Patricia Cook, the government- chartered company's executive vice president of investments and capital markets.

Central banks in Asia hold $3.1 trillion, or about two- thirds, of the world's foreign reserves. Asian investors increased purchases of U.S. agency debt for a third year in 2006 as they shifted from Treasuries in search of higher yields and returns, Treasury Department data show.

Freddie Mac notes returned 4.1 percent last year, the most since 2002, compared with 3.1 percent for Treasuries, according to Merrill Lynch & Co. indexes.

The extra yield, or spread, investors demand to own Freddie Mac's notes over similar-maturity U.S. notes narrowed to 24 basis points on Feb. 16 from 32 basis points six months ago, according to Merrill. A basis point is 0.01 percentage point.

``Demand for dollar assets is going to keep the spreads tight,'' McLean, Virginia-based Cook said in a Tokyo interview on Feb. 16 after meeting central bankers, life insurers and other financial institutions in Beijing, Hong Kong, and the Japanese capital.

Buying Support

Freddie Mac sold 35 percent of its reference notes to investors in Asia in the 12 months ended Sept. 30, compared with about 16 percent in 2001, according to company figures. Reference notes have a minimum issue size of $3 billion.

``Continued interest will support that sort of level,'' in the coming months, said Cook.

Asian investors bought about $135 billion net of U.S. agency debt last year, compared with net purchases of around $66 billion in government notes and bonds, according to Treasury Department figures. Buying of agency debt increased from $118 billion in 2005.

``From the perspective of central banks, it would make sense to shift to non-Treasuries because they probably want any bit of spread,'' said Tokyo-based Yasuhiro Miyata, who helps oversee the equivalent of about $17 billion in assets at DLIBJ Asset Management Co., including agency debt. He declined to comment on his investments.

China holds $1.07 trillion of the world's $4.99 trillion foreign reserves, the largest holding of any country. The next biggest holder globally is Japan, with $875 billion, followed by Russia with $309.5 billion.

Freddie Mac had $776.9 billion in debt outstanding on Dec. 31, according to the company. Congress created McLean-based Freddie Mac and Washington-based Fannie Mae, the biggest mortgage finance company, to expand homeownership by increasing financing, and to provide market stability.

The portfolio of Freddie Mac, which grew by at least 12 percent each year from 1990 until 2004, fell by 0.9 percent last year to $704 billion. Freddie Mac agreed in July to limit its growth to no more than 2 percent annually.

source:www.bloomberg.com