Volume Spike Investor

The weakness over at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) is spilling over into the mortgage REITs and mortgage traders today.  The reason is that credit default swaps (and underlying spreads over Treasuries) have really widended out in the two government sponsored entities today.

Annaly Capital Management (NYSE: NLY) has been thought of as more sheltered in the past, but it has come well off of its highs.  As of 1:21 PM EST its shares are down 9.% at $14.10. Here is the PUT Options activity for the JULY08 PUTS:

• $14.00 Strike: 2,886 contracts vs. prior 1,802 contracts in open interest;
• $15.00 Strike: 7,119 contracts vs. prior 9.974 contracts in open interest.

Much of this data is already known, but the severity on today’s values of paper are being stripped right out of mortgage investors there. Shares in Annaly have already surpassed its 7.1 million shares on an average day.

Fannie Mae shares have nearly doubled their trading volume and shares are down over 18% at $15.35; Freddia Mac shares have have more than tripled their average volume and shares are down 21% at $11.45.

Unfortunately investing mortgages to capture the spreads over other yields doesn’t work as well when spreads widen out and you have to apply new lower values to your existing holdings.

Jon C. Ogg
July 7, 2008