Bernanke comments aid "agency" debt

By Al Yoon

NEW YORK (Reuters) - The $3 trillion market for federal agency debt drew support on Friday after Federal Reserve Chairman Ben Bernanke stressed the importance of strong government backing for housing finance companies Fannie Mae (FNM.P) and Freddie Mac (FRE.P).

But borrowing costs for the two "agencies" are seen hovering near record highs until the government better defines terms of its backing.

Bernanke reiterated U.S. backing for the debt issued by the companies should stay in its current form of a "strong and effective" guarantee as their roles evolve. Investors took some comfort in the view, since concerns over the level of support have pushed agency borrowing costs to levels that may dissuade them from buying mortgages.

Bernanke stopped short of advocating an even stronger, "explicit" guarantee sought by investors.

"It's a case of two different viewpoints, and the government is actively trying to resolve this ... without going out and saying 'explicit' guarantee," said Mahesh Swaminathan, a strategist at Credit Suisse in New York.

"Many investors, especially foreign investors, are possibly seeking a more ironclad guarantee," he said.

Unsecured debt of Fannie Mae and Freddie Mac -- used to fund billions of dollars in purchases of MBS -- this month hit the cheapest levels ever relative to Treasuries amid ongoing perceptions that emergency government support of the U.S. banking system has pushed the bonds lower in relative quality. Explicit guarantees can be put on some corporate debt under a temporary Federal Deposit Insurance Corp program.

Tighter spreads for agency and agency MBS debt markets are seen as crucial for the health of the U.S. housing market since Fannie Mae, Freddie Mac and the Federal Home Loan Bank system provide most funds for home mortgages. Fannie Mae and Freddie Mac own or guarantee nearly half of all U.S. home loans.

A Treasury official this week also stated the "effective" guarantee of agency debt per the right of Treasury to inject up to $200 billion into the companies.

Yield spreads premiums on five-year debt issued by Freddie Mac tightened about 9 basis points on Friday, to 137.5 basis points, according to TradeWeb. The spread narrowed more than 5 basis points versus last Friday, after widening to record levels around 160 basis points earlier this week.

Two-year Freddie Mac note spreads narrowed to 151 basis points from 155 basis points, but are still triple the pre-crisis levels of early 2008.

Foreign central banks, among the biggest investors, have pulled more than $60 billion in agency debt and mortgage bonds from their custody accounts at the Fed this month.

Fannie Mae and Freddie Mac in September were placed into conservatorship by their regulator to ensure capital adequacy, but that intensified government tie failed to retain investors. The conservatorship mandates significant changes to the companies' business models after 2009, also raising questions over the quality of their debt.

Yield spread premiums on MBS guaranteed by Fannie Mae and Freddie Mac also edged tighter on Friday, after reaching the cheapest levels since August this week.

Fannie Mae MBS paying 5.5 percent interest yielded 1.963 percentage points more than 10-year Treasuries, compared with 1.97 points on Thursday and 2.033 points on Tuesday, according to Thomson Reuters data.