Fannie, Freddie Risk-Transfer Bonds Give Investors New Scare

A nascent corner of the market for Fannie Mae and Freddie Mac bonds is on a roller coaster ride despite what Morgan Stanley calls the “pristine performance” of the mortgages linked to the debt.

Prices of the more than $19 billion of notes, often called credit-risk transfer bonds, collapsed over the past few months, largely tracking a renewed drop in competing assets, such as high-yield corporate notes. Risky bonds are slumping as commodity prices tumble on growing economic concerns about China and other emerging markets. Fannie and Freddie are using their risk-sharing securities to get investors to share in their dangers from homeowner defaults.