CALLABLE DEBT
Some common reasons investors have for purchasing callable debt are as follows:
• Callables provide higher yields than bullets maturing on either the call date or the maturity date. The incremental spread offered by callables leads to a greater yield at maturity than is provided by bullet debt of the same maturity. ...
• Indexed investors purchase agency bullet and callable debt to match the share of these securities in major fixed-income indices. Because of its growing popularity and issuance, agency debt is an increasingly larger component of the major fixed-income indexes. This trend has been accentuated by the decline in issuance of debt by the U. ... Many indexed investors include callable agency debt in their portfolios to potentially outperform their benchmark index.
• The call option on callable debt is much easier to analyze than the prepayment behavior of mortgage-related securities. Fannie Maes economic decision to call its securities is an efficient and uniform call decision based on the level of interest rates where Fannie Mae can issue similar duration debt at a lower option adjusted spread. In addition, given the stated final maturity date of a callable debt security, there is no extension risk with callable debt. ... Therefore, many investors have found the more predictable nature of the call decision along with the structural benefits and attractive spreads of Fannie Mae callable debt to be an appealing alternative to mortgage-related securities.
• Callable debt is a potentially attractive vehicle to enhance returns with minimal credit risk. Investors who are seeking higher yields but are reluctant to take on added credit risk or who believe that the corporate credit spreads may widen because of deteriorating credit conditions or negative earnings announcements may instead purchase Fannie Mae callable debt. These investors view the embedded call option risk as less substantial than the credit risk associated with corporate debt.