The prospect of a federal bailout for Fannie Mae and Freddie Mac roiled financial stocks, which seesawed throughout the session but managed to finish higher, fueling a modest rise in the broader market.
The Dow Jones Industrial Average snapped a steep two-day losing streak, ending 68.88 points higher, up 0.6%, at 11417.43, down 14% on the year. Its financial components all advanced, led by a 4.3% gain in Bank of America. J.P. Morgan Chase rose 4%, while American International Group gained 2.4%.
However, Fannie and Freddie, which are not Dow components, continued to bear the brunt of investors’ lingering concern about Wall Street’s year-long credit crisis. Fannie slid 26.7% and Freddie was off 22.1% as sellers continued to bet that the government-sponsored entities will need a bailout from the Treasury Department. Both companies are on four-day losing streaks during which they’ve plunged more than 45%.
Bond traders were much happier that a bailout might be on the verge of fruition. Spreads narrowed between the government-sponsored lenders’ debt and Treasury securities, signaling that investors see less risk in lending to Fannie and Freddie with a potential bailout approaching. The yield on five-year bonds issued by Freddie was recently less than 100 basis points above the yield on five-year Treasurys, down from 113 basis points, according to TradeWeb.
By comparison, spreads for the riskiest corporate borrowers not backed by the government were holding steady. S&P said its composite measure of spreads on speculative-grade credit was hovering around 780 basis points above Treasurys, close to the March high and 35% wider than it was at the start of the year.
“The fact that we’ve barely seen spreads come in at all speaks to the lack of availability of credit,” as financial firms have tightened lending standards or closed shop in recent months, said Douglas Peta, market strategist at J. & W. Seligman & Co. “That’s going to continue to be a problem for the economy because you need an expansion of credit to have real growth.”
