By the Numbers
Portfolio balance down, risk up at Freddie Mac
This material is a Marketing Communication and does not constitute Independent Investment Research.
The balance of Freddie Mac’s investment portfolio slipped by $2.42 billion in January while its duration gap, a measure of interest rate risk, rose. The lower balance creates some uncertainty around the course of administration plans for Fannie Mae and Freddie Mac to buy $200 billion in MBS, and the rising risk raises questions about the agency’s hedging approach. The news should prove a marginal drag on MBS performance and add marginal momentum for tighter swap spreads and lower volatility.
The latest disclosures also indicate the portfolio is roughly 4.4x leveraged, which is far less than the roughly 40x leverage maintained before 2008.
The balance of agency mortgage-backed securities in Freddie Mac’s investment portfolio grew $4.0 billion in January but was more than offset by a $6.4 billion drop in loan balances (Exhibit 1). The month-over-month increase in securities is consistent with monthly growth since September. Loan growth has been higher than securities growth over that period, although less consistent from month-to-month.
Exhibit 1. Freddie Mac’s investment portfolio shrank in January
Source: Freddie Mac, Santander US Capital Markets.
Overall, the portfolio’s balance started to grow after June (Exhibit 2). Freddie’s portfolio increased $42.7 billion from June through December, ending the year at $139.2 billion (44.2% growth). More of Freddie’s portfolio growth over this period came from loans than securities, as the former grew $25.0 billion while the latter increased $17.5 billion. Fannie Mae also grew its investment portfolio after June, adding $47.6 billion and ending the year at $132.5 billion (56.2% increase).
Exhibit 2. Freddie Mac’s investment portfolio began growing after June
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Freddie Mac’s January activity raises questions about plans for Freddie Mac and Fannie Mae to buy $200 billion MBS. It is uncertain whether that target represents entirely new demand from the GSEs or incorporates the pace of buying conducted by the portfolios in the second half of last year. This should become clearer over time, but in the meantime adds to the market’s uncertainty about the strength of the agencies’ mortgage demand.
The investment portfolio’s exposure to interest rate risk also increased in January (Exhibit 3). The portfolio’s duration gap measures the sensitivity of portfolio value to changes in interest rates. For example, the duration gap is currently 0.67 years, which means the portfolio’s value is expected to drop 0.67% if rates rise 100 bp and gain 0.67% if rates fall 100 bp. Those estimates ignore the negative convexity typical of mortgage portfolios, which means the portfolio should lose even more if rates were to increase but gain less if rates were to decrease.
Exhibit 3. The investment portfolio is taking more interest rate risk
Source: Freddie Mac, Santander US Capital Markets.
Freddie Mac’s investment portfolio’s exposure to interest rate risk has been growing. The duration gap increased from 0.25 years in September to 0.67 years in January.
The duration gap is a result of two different approaches to managing risk. Freddie Mac splits the investment portfolio into two groups. One group is holdings primarily financed by debt, where Freddie Mac targets a zero-duration gap. But the other, equity-financed group is allowed to be positive duration and currently has a 35-month duration gap. Since the total duration gap is 8 months the portfolio must be 22.9% [=8/35] equity-financed and 77.1% debt-financed, or roughly 4.4x levered. This is much lower than the 40x leverage the GSEs operated with before 2008.
The duration gap also changes when rates move due to bond convexity. The enterprises need to hedge convexity to keep duration near zero. This can be done by paying fixed on interest-rate swaps, buying interest rate options or delta hedging. Freddie Mac apparently is doing this on 77.1% of a growing portfolio. Allowing a non-zero duration gap in the remaining 22.9% of the book means that demand for these instruments from Freddie Mac and Fannie Mae should be lower than it might have been before 2008.
Apparent hedging for the majority of Freddie Mac’s portfolio should marginally push swap spreads wider and raise the value of interest rate options, reflecting the agency’s need to pay fixed on swaps to offset MBS duration and to buy options or delta hedge to manage convexity. However, the longer duration gap in the minority of the portfolio suggests that Freddie Mac is hedging less than it did prior to 2008. Less active hedging of this portion may leave the pay-fixed pressure and the option bid lower than some investors may have anticipated.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
