Sectors widen ahead of the Fed

By Julie Haviv

NEW YORK (Reuters) - Yield spreads on Fannie Mae and Freddie Mac U.S. mortgage-backed securities and "federal agency" debt widened against Treasuries on Tuesday a day before a statement from the Federal Reserve on monetary policy.

The Federal Open Market Committee, the Fed's policy-making arm, will conclude its two-day meeting on Wednesday. While the central bank is widely expected to leave rates unchanged, the accompanying statement is considered key with any significant changes to its stance on the economy or purchase programs seen influencing the direction of interest rates.

The regular buying by the Federal Reserve has been the biggest positive for agency MBS and agency debt securities, but the purchase programs have inflated the prices of some securities to levels that some investors deem unappealing. Some investors believe the risk/reward is more attractive in other spread products, such as corporate bonds.

The yield spread on the 30-year Fannie Mae 4.50 percent current coupon was 147 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.

"Originator supply was on the heavy side, mostly in 30-year 4.50 percent and 5 percent coupons," he said.

"Meanwhile, the Federal Reserve did not buy as much as they usually do," he said.

Mortgage bonds, however, 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.

Active 15- and 30-year mortgage securities were unchanged to 3/32 lower. Prices on 30-year 4.50 percent coupons were 2/32 to 3/32 lower. Bond equivalent yields on 30-year 4.50 percent coupon MBS ranged from 4.252 to 4.307 percent.

Prices on 30-year 5.00 percent coupons were 2/32 to 3/32 lower. Bond equivalent yields on 30-year 5.00 percent coupon MBS ranged from 3.668 to 3.923 percent.

The Federal Reserve has been a force to be reckoned with in agency MBS. The Fed is committed to buying the entire $1.25 trillion allotted for its agency MBS program by the end of the first quarter of 2010.

The Fed's purchases of agency MBS and agency debt so far in 2009 total roughly $977 billion and $147 billion, respectively.

The Fed also plans to end its agency debt purchase program by the end of the first quarter, but it is unknown if it will end up buying the entire $200 billion allotted. Meanwhile, its $300 billion of Treasuries purchases has concluded. The purchases are part of the Fed's effort to lower borrowing costs.

Yield spreads on Fannie Mae (FNM.P) (FNM.N) and Freddie Mac (FRE.P) (FRE.N) agency debt securities were 0.5 basis points tighter to 3 basis points wider against Treasuries.

Freddie Mac on Wednesday will announce November debt funding plans.