How are the credit spreads of Fannie and Freddie affected/determined by the prospects of government action?

Question

how does the prospect of gov confiscation affect the credit spread?

any examples? (real or hypothetical)..

Answer 1

"Sentiment in the European market for credit default deteriorated on Wednesday, hurt by volatile oil prices and persistent anxiety over the health of the US financial sector.

By late afternoon in London, the Markit iTraxx Europe index was trading around 98.2 basis points, almost 2bp wider than the previous close.

Spreads in the US also moved wider, with the benchmark CDX North America investment grade index 2.3bp wider on the day at 143.17bp.

In single names, insurer AIG continued the widening trade triggered by a strongly critical analyst note from Goldman Sachs . Five-year CDS contracts on AIG’s debt were quoted 16.4bp wider at 348.5bp, according to Markit data.

Meanwhile, as shares in Fannie Mae and Freddie Mac plunged to 18-year lows, credit investors bid the cost of protecting the mortgage behemoths lower. Any government intervention on behalf of the beleagured lenders would hurt shareholders, whereas debt holders would benefit from the (relative) strength of an explicit US backstop.

CDS on Freddie and Fannie’s senior debt had rallied almost 12 per cent and 9 per cent respectively to 43.5bp by lunchtime in New York."