Calandra covers silver rally; Sinclair tells gold bugs to be like Cool Hand Luke

ECB Recommends Central Banks Sell
U.S. Agency Debt, Source Says

a href=http://quote.bloomberg.com/apps/news?http://quote.bloomberg.com/apps/new...
pid=10000006amp;sid=aC.i6ebZSE6Mamp;refer=home

FRANKFURT, July 28 (Bloomberg) -- The European Central
Bank is eliminating its holdings of debt issued by Freddie
Mac and Fannie Mae, the two biggest U.S. providers of
mortgage financing, and recommended that its national
central banks do the same, according to a person who has
seen the ECB's recommendation.

The Frankfurt-based central bank, which sets interest rates
for the 12 countries sharing the euro, gave its opinion at the
last meeting of the 18-member governing council on July 10,
said the person who declined to be named.

ECB spokeswoman Regina Schueller declined to comment.

Officials of the 12 central banks declined to comment.

Freddie Mac is under investigation by the U.S. Securities
and Exchange Commission and federal prosecutors after
overstating earnings, leading to the ouster of its top three
managers.

The difference between yields on Freddie Mac notes and
comparable U.S. government debt has increased this year
as investors perceive Freddie Mac debt to be more risky.

quot;Some investors will ask themselves: Is this really as safe
as I thought it was? And some will say: This is too risky
for me,quot; said Louis Hagen, general manager of the
Association of German Mortgage Banks in Berlin.

McLean, Virginia-based Freddie Mac said last month it
understated profits by as much as $4.5 billion during the
past three years as it made errors in applying generally
accepted accounting principles in valuing derivatives
contracts. Derivatives are financial obligations tied to the
value of debt and equity securities, commodities, and
currencies.

The ECB based its recommendation to the national
central banks on credit risk, the person who declined to
be identified said.

Freddie Mac spokeswoman Heather Sieber declined to
comment.

quot;We do not comment about specific investors,quot; Fannie
Mae spokesman Jason Lobo said. quot;Our investors are
broadly distributed around the world and those investors
include central banks.quot;

Fannie Mae and Freddie Mac own or guarantee about
42 percent of the $7 trillion U.S. mortgage market. Fannie
Mae's mortgage portfolio is worth about $816 billion, while
Freddie Mac controls about $573 billion of mortgages.

The two companies, regulated by the Office of Federal
Housing Enterprise Oversight, are known as
government-sponsored enterprises. While the U.S.
government doesn't guarantee any of their obligations, both
Fannie Mae and Freddie Mac have Aaa ratings from Moody's
Investors Service and Standard amp; Poor's.

Freddie Mac notes maturing in January 2013 traded 43.5
basis points more than 10-year Treasuries, widening from
26 basis points before the company announced the
management changes, according to J.P. Morgan Securities.
Since June 6, the yield spread widened to as much as 44.5
basis points before rebounding back to 33 basis points.

The ECB doesn't disclose any breakdown of its reserves,
and spokeswoman Schueller declined to comment on how
much U.S. agency debt either the ECB or the 12 national
central banks of the nations sharing the euro hold.

The ECB's foreign currency reserves are managed by the
euro region's 12 national central banks on the basis of ECB
guidelines. The ECB can order the other central banks what
to do with its own reserves, while the national central banks
have control over their own reserves.

The ECB and the national central banks had combined foreign
currency assets of 221.2 billion euros at the end of last week,
of which 205.4 billion were claims on residents outside the
euro region.

The region's central banks sold 3.075 billion euros in foreign
currency reserves in the week ended July 18 that were owed
to them by residents outside the euro region, the
second-biggest sale in more than a year, according to
Bloomberg calculations based on ECB data.

So-called agency debt held in custody for foreign central
banks has declined in six of the past seven weeks to
$183.25 billion from a record $189.9 billion, according to
the Federal Reserve.

Foreign central banks sold $585 million in the week ended
July 23, the Fed said. By comparison, foreign central banks'
holdings of U.S. Treasury debt declined by $3.88 billion in
the latest week to $753.74 billion. Those banks sold $3.27
billion Treasuries in the prior week.

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