Fannie Mae Debt Sale Sets Milestone For New Borrowing Benchmark
July 26 2018 - 5:48PM
Dow Jones News
By Vipal Monga and Daniel Kruger
A benchmark lending rate that regulators and investors hope can
replace the scandal-plagued Libor as the foundation for trillions
of dollars of debt from credit cards to business loans easily
passed a key test.
Mortgage finance giant Fannie Mae sold $6 billion of
adjustable-rate securities in the first major trial run of the new
index Thursday. The sale marked a milestone for borrowers,
investors and bankers as Libor, the London interbank offered rate,
begins its planned wind-down from ubiquitous metric to expiration
at the end of 2021.
Once obscure, Libor eventually became the foundation for
trillions of dollars of derivatives and other financial contracts.
More recently, it was discredited after evidence emerged that bank
traders were manipulating it to boost trading profits. Banks were
fined billions of dollars, and several traders were sent to prison.
Since 2012, Libor has been under the supervision of U.K.
regulators.
On Thursday, investor demand for the Libor-replacement proved
strong enough that it could inspire other borrowers to use the new
benchmark, analysts said. Known as the secured overnight financing
rate, or SOFR, the new index was developed by a panel of banks and
investors overseen by the Federal Reserve, as part of an effort to
move contracts away from Libor.
The new product is one of several that aims to address a major
challenge for the financial markets. Libor-based contracts cover
many borrowings including floating-rate home mortgages, business
loans and complex financial instruments.
"There is a massive amount of work to do to move all that risk
from Libor to another index," said Michael Cloherty, head of
interest-rate strategy at RBC Capital Markets. "It's a long, long
path."
Fannie Mae is part of a group of financial industry associations
and banks convened by the Fed in 2014 to address replacing Libor.
Last year, the group approved the new rate as an alternative to
U.S.-dollar-based Libor.
Libor has been calculated by asking banks how much it
theoretically would cost them to borrow money from other banks,
making it possible to manipulate. The new SOFR rate is averaged
from more than $750 billion of short-term loans made every day,
known as repurchase agreements or "repo" trades, backed by Treasury
securities as collateral. Analysts expect it to be resistant to
attempts at manipulation.
As of Wednesday, the SOFR rate was 1.87%, based on $753 billion
worth of transactions, according the Federal Reserve Bank of New
York. Fannie Mae's bonds were priced in three segments, maturing in
six, 12 and 18 months, carrying rates that exceeded SOFR by 0.08,
0.12 and 0.16 percentage points, respectively.
The rate is "more robust" than Libor because it's based on
actual market trades that reflect the price at which banks and
other financial institutions can borrow, said Greg Moore, head of
U.S. fixed income currencies and commodities at TD Securities USA,
which was one of the lead managers on Fannie Mae's offering, along
with Barclays Capital Inc. and Nomura Securities International
lnc.
Supporting the Libor replacement has been a pressing priority
for regulators and market participants as the old benchmark moves
closer to disappearing. Fed Vice Chairman for Supervision Randal
Quarles last week revealed data showing the dearth of transactions
that reference Libor each day, and said banks are "justifiably
uncomfortable" with how thin the underlying markets for Libor have
become.
Still, Mr. Quarles said the transition toward the replacement
rate was proceeding "ahead of schedule."
While Libor's history has been troubled, the rate will likely
continue to be widely used for some time to come, said Moti
Jungreis, head of global markets at TD. In part, that is because
the rate is still used in trillions of dollars worth of contracts
that were signed before the index fell out of favor.
Write to Vipal Monga at vipal.monga@wsj.com and Daniel Kruger at
Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
July 26, 2018 17:33 ET (21:33 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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