Last week, Fannie Mae reported a slightly higher duration gap - although still within its targeted range of plus-or-minus six months. The duration gap rose to negative five months at the end of February from negative four months in January.

This is despite general market expectation that there would be a repeat of last August when Fannie's duration jumped to negative 14 months from negative nine months in July of last year. During that period, 10-year Treasury interest rates dipped 28 basis points, according to Salomon Smith Barney. Despite a similar dip in interest rates in February of this year, the GSE actually managed to maintain its duration gap within its targeted range. Salomon said that this should alleviate buysiders' concerns of perceived interest rate risk.

The weaker-than-expected rise in Fannie's duration disappointed some investors. "We believe the bearish investors had believed this gap could have been much wider, and this news may come as a disappointment," said researchers from U.S. Bancorp Piper Jaffray. "FNMA continues to do a good job managing interest rate risk in this volatile interest rate environment."

In a report released before Fannie's February data went out, JPMorgan Securities enumerated some factors that could have impacted Fannie's duration gap in February. These factors might have minimized the jump in the GSE's duration gap.

The firm said that there have been concerns about the duration gap because of the recent sharp dip in mortgage rates and the resurgence of refinancings. However, while refinancings have obviously soared, the most significant increase in refinancings only happened in the past one and half weeks, closely following the very steep fall in mortgage rates that occurred in early March. The February monthly volume summary only covers the duration gap as of Feb. 28, thus the recent refinancing surge does not impact the results at all.

Aside from this, 30-year fixed-rates fell 11 basis points in February, which most likely impacted Fannie's duration gap because it shortens the duration of assets, said analysts.

However, the GSE is better positioned due to the fact that its funding mix has a shorter maturity compared to last summer. This is a result of the higher percentage of short-term debt (17% at year-end 2002 compared with 5% at June 30, 2002). There is also the sharp increase in option-embedded debt at 76% of the retained portfolio at the end of last year, which is up from 58% last June 30. Further, researchers said Fannie Mae has issued more debt and has most likely added hedging since the end of last year. This probably also had an impact on the February numbers.

Meanwhile, the GSE also reported that its total book of business grew at an annualized rate of 22.6% in February, versus 28.3% in January. The retained portfolio increased at a 9.5% rate compared to 34.6% in January. Also noteworthy is that MBS outstanding grew at 33.7% in February as oppose to only 23.8% in January.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

(http://www.thomsonmedia.com)

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