Fannie Mae Interest Rate Risk Eases; Shares Jump

Mortgage giant Fannie Mae said Tuesday that it increased its protection against falling interest rates last month, easing concern that its profit margins would be squeezed.

The news spurred a rally in Fannie Mae stock and prompted investors to turn away from Treasury bonds as some traders bet the mortgage financier would need to buy less government debt. Shares of Fannie Mae, the largest buyer of U.S. mortgages, rose $5.68 to $65.22, and shares of Freddie Mac, the second-biggest mortgage buyer, rose $3.25 to $59.15.

Fannie Mae said a measure of its interest-rate risk narrowed, reversing a five-month trend that worsened as the lowest rates in decades fueled a surge in home refinancing.

Faster-than-expected prepayments on loans in Fannie Mae’s $747-billion portfolio raised speculation that income from assets would fall before the company could refinance its debt to lower rates.

Fannie Mae said its so-called duration gap shrank to minus-10 months in September from minus-14 months in August. Although smaller, the gap still is outside the company’s desired range of plus or minus six months.

Fannie Mae stock had tumbled 18% over the last 2 1/2 weeks as interest rates dropped to the lowest levels in more than four decades.

“What we’ve already seen is costing them some future earnings, and that’s one reason the stock got hit,” said Mike Ancell, an analyst at Banc of America Capital Management in St. Louis. “But it seems to be less of a problem than some folks thought it was.”

The August duration number fueled speculation that Fannie Mae would have to protect itself from refinancing by increasing purchases of interest-rate derivatives and U.S. government debt.

Investors retreated from government bonds Tuesday as dealers expected Fannie Mae will be less likely to purchase Treasuries, which are a more expensive option than adding new mortgages. The yield on the benchmark 10-year Treasury note rose to 3.72% from Monday’s close of 3.60%.