Sectors mixed as varied factors weigh

By Julie Haviv

NEW YORK (Reuters) - Yield spreads on Fannie Mae and Freddie Mac U.S. mortgage-backed securities widened against Treasuries on Tuesday, while "federal agency" debt tightened, as market participants mulled the impact of Federal Reserve purchases against lofty prices.

The regular buying by the Federal Reserve has been the biggest positive for agency MBS and agency debt securities, but it has also inflated prices to high levels.

"The MBS market has been trading well lately, if slightly at the richer end of the range," said Todd White, portfolio manager at RiverSource Investments, who is based in Minneapolis, Minnesota.

"Net supply is down considerably and the federal government continues to buy MBS," he said.

So, while spreads currently may not look attractive on a strictly historical basis, implied volatility is down and prepayments continue to be insignificant, he said.

Refinancing activity, which has been subdued, can affect prepayment speeds, key factors that investors use to determine the value of mortgage bonds. If prepayment speeds rise or fall too quickly, they hurt returns on mortgage securities.

RiverSource continues to be overweight on MBS, particularly the higher coupons, rather than the 30-year 4.00 percent and 4.50 percent coupons, he said.

RiverSource Investments has about $93 billion in fixed-income assets under management.

The yield premium on Fannie Mae MBS paying 4.50 percent interest compared with the 10-year Treasury note widened to 0.720 percentage points on Tuesday from 0.643 percentage points on Monday, according to Reuters data.

Agency MBS have richened so far in November after closing October with a yield premium of 0.811 percentage points.

That is sharply narrower than the end of last year when the yield premium was around 1.863 percentage point.

"There's certainly the potential for a significant widening after the federal government stops buying MBS," White said.

"When that happens, investors may not feel as comfortable holding as large an overweight position in mortgages as they currently do," he said.

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 recently revised the target size of its agency debt purchase program to about $175 billion from up to $200 billion, also to be completed by the end of the first quarter of 2010.

Yield spreads on agency debt securities ended 1 basis points to 3 basis points tighter against Treasuries.