FNMA 8¼ PERP (Update)

Please note, this is an update to FNMA 8¼ PERP - Long, which was originally presented in Feb 2017.

Publicly traded companies mentioned herein: Federal National Mortgage Association (FNMA)

Highlights

The risk/reward setup with Fannie Mae, specifically the FNMA 8¼ preferred, is, in the presenter’s opinion, “Better today that it has ever been.” There are other issues with different face amounts, but they all trade in the mid- to high-20%s of par. His paper is liquid and trades at ~26 cents (~6.50), and there is a good chance that the momentum seen with the movement to recapitalize Fannie in 2018 will carry into early 2019. If his assessment of the situation is right, the odds of a favorable judgement seem to be rising. The headline risk is high, but on Tuesday (12/18) Treasury Secretary Steve Mnuchin told Bloomberg that he and the Trump administration want the conservatorship to end, and that they would like to see Congress pass a bill. In lieu of such a bipartisan solution, he implied that there are other solutions (in the absence of a bill); however, the mere fact that the process is moving along is potentially positive. If/when Fannie is recapitalized, the preferreds could quickly trade up to 0.70 - 0.80 (investors are not likely to receive par, which is 25).