Medium Term Notes (MTN) Callable
Callable debt is term debt within which the issuer has the right, but not an obligation, to call (or retire) the bonds prior to the final maturity of the issue. Freddie Mac can issue callable debt in a variety of forms, with final maturities typically ranging from one to thirty years, and call provisions effective as early as three months or as distant as ten years after the securities are issued. Our securities can be issued with either single or multiple call provisions, depending upon investors’ and Freddie Mac’s requirements.
Popular types of call provisions include American (continuous call option on or after a certain date), European (single call on a certain date) or Bermudan (multiple discrete calls, e.g., on certain interest payment dates). To compensate for the maturity uncertainty that an investor is assuming by its purchase, callable debt is priced to yield a premium over the yield obtainable from bullet (or fixed maturity) debt with the same final maturity.
In order to give investors who purchase callable debt the types of risk/reward characteristics that they desire, Freddie Mac offers a broad range of callable debt alternatives, tempered by market demand. Last year Freddie Mac issued dozens of different types of callable issues, encompassing a variety of first call dates, final maturities and call provisions. Freddie Mac continues to execute significant amounts of callable debt funding, with a hallmark of offering issues, which are flexibly tailored in response to constantly changing market needs. In addition to a large primary market, Freddie Mac's callable debt enjoys strong support in the secondary markets from investors in the U.S. who have purchased the firm’s debt securities for decades.
Investors interested in gaining additional yield, while maintaining outstanding credit quality, may find Freddie Mac's Aaa/AAA-rated callable debt an appealing alternative.
In an era of low nominal interest rates in many of the world’s principal currencies, investors globally are seeking higher-yield fixed income investment alternatives. At the same time, heightened concerns about credit risks and about the secondary market liquidity of many types of debt have changed investors’ fixed income preferences. In such an environment, Aaa/AAA-rated callable debt can serve a key role in many investment portfolios, by providing a substantial yield pickup versus straight bullet maturity debt without entailing incremental credit risk.
For investors who can accept maturity uncertainty in their fixed income portfolios, the yields available on callable bonds can be very attractive. Different investors have divergent perspectives on how to measure and balance the risk and return of such callable debt and, for some investors, direct comparisons to bullet maturity debt are not the best indications of value. However, for investors who can accept uncertain timing in the repayment of principal, callable debt will tend to outperform bullet debt of the same maturity in two of three basic interest rate scenarios (with rates either stable or increasing).
Freddie Mac’s Use of Callable Debt
Freddie Mac uses callable debt as one of many tools to manage the convexity and duration risks attendant with the firm’s extensive portfolio holdings in mortgage-backed securities. Unlike some issuers, Freddie Mac retains the call option of the security and controls when the call is to be exercised, thus providing consistency to the notification and processing of the call.