This Week's Year's Biggest Test: Freddie Mac To Sell $1 Billion of Commercial Mortgage Bonds

As market sentiment has picked up this year, there have been a wide range of organizations, from big banks to language educators, looking to raise money on the open market via everything from initial public offerings to corporate bond issuances.  

In the coming week investors may see the most significant round of public capital raising yet. State-owned housing giant Freddie Mac is expected to sell nearly $1 billion of commercial-mortgage bonds backed by multifamily loans Tuesday. The money is expected to be used to beef-up the lackluster apartment sector, according to The Wall Street Journal.

With loans secured on apartments and condos defaulting at an increased rate of 5.12% in April, selling the bonds might not be as easy a task as some of the successful range of capital raisings on Wall Street this year. Deutsche Bank, who is expected to handle the issue of the bonds, has its work cut out for itself.

And the success of the bond issuance could have dramatic consequences for market sentiment either way. For a start, via its ownership stake in Freddie Mac, the government is essentially guaranteeing the goodwill of the bonds (if it decides to keep pouring money into Freddie, a decision in which it has little choice for now).

If for any reason the sale goes poorly, that would be a significant slap in the face for confidence in the U.S.’s credit rating, which came into question earlier in the week when one money manager indicated the country may lose its AAA status.

A poor sales result would also indicate that trouble in the housing sector is unlikely to abate for a very long time, perhaps as far away as 2012 or 2013. That will weigh on the financial sector, which is already experiencing some significant pain at the regional level.

If the sale goes well, however, the result could be extreme in the other direction. That might mean for many that we are finally at an inflexion point in the economic downturn, and it would help confirm recent confidence in financials and construction companies in particular.

Best of all, there’s no reason why the sale of Freddie Mac bonds shouldn’t go spectacularly well.

They represent a great deal for investors with the chance to participate. For while these are essentially high-yield bonds, thanks to the government’s involvement they represent a pretty low-risk way to get in on an upturn in the housing market. If the Freddie bonds sell well, you can therefore expect to see more deep dips in the prices of Treasuries, which will send equity prices rallying.

And in a related bracket, demand for mortgage-backed securities has been strong lately. Treasury purchased $136 billion in securities in April, and a further $740 billion mid-May.

A Freddie Mac bond sale is a big test for the economy and for U.S. equity markets. But with conditions on the up and investors looking for the next big catalyst, now may be just the perfect moment for it.