Morning Commentary: Preferreds give back some gains; sell-off in Fannie, Freddie paper continues

By Stephanie N. Rotondo

Seattle, Dec. 2 – Weakness was once again invading the preferred stock market on Wednesday.

The Wells Fargo Hybrid and Preferred Securities index was down 9 basis points at mid-morning. The index ended Tuesday’s session 20 bps higher.

One trader noted that the sell-off in Fannie Mae and Freddie Mac paper “seems to continue,” adding that the decline has “been pretty steady for the past two weeks.”

The losses have “been substantial,” the trader said. For some issues, the drop has amounted to as much as 30%, though on average he speculated that the paper has drifted down around 20% in the last couple of weeks.

“I’m not sure why, and it’s been on light volume,” he noted.

Still, the trader remarked that ongoing litigation – including a pending case in Iowa – could be the root of the problem.

Shareholders currently have several cases pending against the GSEs, as well as the federal government. Most center on the government’s 2012 conscription of a majority of the agencies’ profits.

Regardless of what is causing the weakness, the trader opined that “we will probably see them weaken until the end of the year or until some decent buyers come in.”

He noted that he “would be a buyer” of the preferreds around $3.75 a share.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were down 13 cents, or 3.17%, at $3.97 in early trading. Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were off 15 cents, or 3.66%, at $3.95.

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