Sectors soften on strong housing data

NEW YORK (Reuters) - Yield spreads on Fannie Mae FNM.P FNM.N and Freddie Mac FRE.P FRE.N U.S. mortgage-backed securities and most "federal agency" debt widened against Treasuries on Tuesday as housing market data pointed to a sector on the mend.

Better-than-expected economic data has prompted some investors to increase their risk appetite, but government purchases of agency MBS and agency debt securities, along with limited supply, has helped keep prices firm in those sectors.

The National Association of Realtors said its pending home sales index, based on contracts signed in June, rose 3.6 percent to 94.6. It was the fifth straight month of advance and the first such streak in six years, the industry group said.

The yield spread on the 30-year Fannie Mae 4.50 percent current coupon was 138 basis points over the 5- and 10-year Treasury blend on Tuesday, about 1 basis point wider than Monday's close, according to Arthur Frank, director and head of MBS research at Deutsche Bank Securities in New York. That was unchanged from the end of July.

"Leveraged investors, namely hedge funds, have been selling, but flows overall are light," he said. "Mortgage bonds have gotten pretty rich and have had a good run."

Mortgage bonds have fared well this year.

The yield spread ended 2008 at about 201 basis points and is significantly below the widest level on record set on March 6, 2008, at 293 basis points, he said.

The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The purchases are part of efforts to lower borrowing costs.

The Fed is more than halfway through its GSE purchase programs. The Fed purchases of agency MBS and agency debt total $702.058 billion and $107.316 billion, so far, respectively.

Citigroup said the Federal Reserve may alter the pace of its agency debt and agency MBS purchase programs, extending them beyond December 31.

The timeline of both programs may be extended to prevent spread volatility surrounding the cut-off, but the size will probably not be increased, with the completion date for agency debt and agency MBS purchases seen extended to late-February and late-January, respectively, Citigroup said in recent research.

About 10-15 basis points of spread widening may occur in agency debt assuming a gradual program wind-down, but agency MBS should fare better because pent-up demand, coupled with projected low net supply, should ease the impact of the Federal Reserve's exit, Citigroup said.

Active 15- and 30-year mortgage securities were 1/32 to 7/32 lower. Prices on 30-year 4.50 percent coupons were 7/32 lower. Bond equivalent yields on 30-year 4.50 percent coupon MBS ranged from 4.510 percent to 4.570 percent.

Prices on 30-year 5.00 percent coupons were 5/32 lower. Bond equivalent yields on 30-year 5.00 percent coupon MBS ranged from 4.392 percent to 4.447 percent.

Separately, yield spreads on agency debt securities mostly widened against Treasuries, with new supply in the pipeline.

Freddie Mac said it plans to issue a new three-year reference note due September 21, 2012, on Wednesday. It gave no size.

U.S. 10-year Treasury notes were 9/32 lower at 95-15/32 to yield 3.679 percent. Yields, which move inversely to price, were up from late Monday's 3.635 percent.

(Additional Reporting by Lucia Mutikani and Caryn Trokie; Editing by Leslie Adler)