Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion

* Treasury securities outstanding as of March 31, according to the Fed’s Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.

If Fannie’s and Freddie’s obligations were equivalent to 10% or even 20% of the U.S. Treasury debts, the idea that they could fit under the Treasury’s “full faith and credit” umbrella might make sense. But that’s not the situation we have here — Fannie’s and Freddie’s obligations are the equivalent of 100% of the Treasury’s debts.

And it’s actually worse than that:

* Foreign investors, the most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding. But …

* Foreign investors own 52.7% of the Treasury securities outstanding (excluding those held by the Fed).

So based on the above stats, Treasury securities are actually more vulnerable to foreign selling than Fannie and Freddie bonds.

What happens if the international mistrust and fear afflicting Fannie and Freddie bonds infects U.S. Treasury bonds? Foreign investors would start dumping Treasury securities en masse. They’d drive Treasury rates sharply higher. And they’d wind up forcing Fannie and Freddie to pay much higher rates for their borrowings after all.

How will you know? Just watch the all-critical spread (difference) between the yield on Fannie-Freddie bonds, considered lower quality, and the yield on equivalent government bonds, considered high quality. Then consider these two possibilities:

* If that spread narrows mostly because Fannie and Freddie interest rates are coming down toward the level of the Treasury rates, fine. That means the immediate goal of the bailout is being achieved. BUT …

* If the spread narrows mostly because Treasury rates are going up toward the level of Fannie’s and Freddie’s rates, that’s not so fine. It not only means a failure to achieve the immediate goals, but it will also imply that the entire Fannie-Freddie bailout is backfiring on the Treasury.

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