Thought Leadership

FNMA: A Study in Risk and Reward

December 8, 2004

Curiously, since news of FNMA’s accounting and management problems became known, the spread of FNMA bonds to U.S. Treasuries (the extra yield FNMA pays over the yield of a comparable maturity treasury bond), has barely moved at all.  FNMA spreads remain at the richest levels in many years.  While the bond market continues to give FNMA a vote of approval, we disagree with the market’s conclusion.  As a result, we currently do not anticipate buying bonds issued by FNMA for our clients because the current yields offered by these securities do not, in our view, adequately compensate investors for the risks associated with the organization.