What are your reasons for being in Asia at the moment?
Herrle: Freddie Mac regularly comes to Asia as part of our general marketing efforts. We have a global investor base and Asia is a very important part of it. At the beginning of the year we started a syndicated callable note programme with issue sizes ranging from $1.5 billion to $3 billion. Since then, Asia has been the biggest single participant in that programme outside of the US. So on this trip I'm talking to investors about Freddie Mac's activity in the callable market and our issuance programme. Investors in the region are looking at ways to increase yield without compromising credit quality and so they're looking at our callable notes.
How are these callable notes structured?
It depends. We tend to meet investors' demands. So if we hear from our dealers that there's demand for a five year no call two - if it meets our own internal requirements - we will do that and proceed to issue. Our main requirement is that we want any issue to be large enough so that it's liquid. So far we have issued $15 billion this year that is an average of one issue per month since January.
Another reason why I am in Asia this time is that we have announced we are doing a 10 year Euro deal with Salomon Smith Barney, Lehman Brothers and Goldman Sachs and so I'm meeting certain investors about this deal.
How important is Asia as a source of finance for you?
Asia has always been important for us but recently it has become more important. For instance, our issue size is between $4 billion and $8 billion of Reference Notes and Eur5 billion of Reference Notes. And at the moment about 15% of that issuance goes to Asia. This is up from 10% five years ago. In the new callable products we're issuing, Asia accounts for up to 23% of the total programme. So in total we raise about $12 billion from Asia every year. Therefore it is very important for us to come to the region and meet investors and answer their questions.
What questions and issues are investors here focusing on when they meet you?
They are especially interested in our 2003 reference note financing calendar. This calendar allows our investors to prepare for our issuance and it lets other issuers strategize when they want to come to the market around our issues.
Another big question that investors are asking is 'is there a housing bubble in the US?' It is our view that there is not a housing bubble. Fundamentally, interest rates are at all time lows. Therefore mortgage affordability is much greater which means demand is much more underpinned than if rates were higher. Also housing is not a speculative market in the US. Transaction costs are high and there is a very broad base of ownership 90% of mortgage debt is on houses that are owner occupied so there is very little of a speculative element to it.. Also inventory levels of unsold homes are near all time lows and there is not an excess supply of homes in the market. Finally, for the past ten years, US house prices have gone up in line with household income growth.
Given the low interest rate environments here in Asia and the growing liquidity of the local capital markets, what are your domestic currency borrowing plans?
In May this year, we issued a S$300 million deal which was well received. We are monitoring that issue and seeing how it trades. Basically we need to swap any funding back into US dollars and so our local currency issuance programme will be basically driven by swap spreads, which are expensive right now.
What is your view on the so-called Asian bid and its role in driving capital flows around the world?
This region is one of great potential growth for Freddie Mac. Our upcoming Euro deal will demonstrate the expanded investor interest we have from Asia now. Also, we expect Asian participation to continue to be a main driver of our syndicated callable program.