MORTGAGES/AGENCIES-Spreads tighter on Fed plan, Freddie launches

(Adds quotes, byline, Freddie deal launch, updates spreads)

By Lynn Adler

NEW YORK, March 11 (Reuters) - Yield premiums on U.S. mortgage and agency debt are snapping sharply tighter on Tuesday after the Federal Reserve and other central banks announced a plan to infuse the financial system with liquidity.

The Fed said it would allow dealers to use U.S. agency debentures and agency mortgage debt, including private label mortgage securities, as collateral on the new facility.

The new lending facility, for up to $200 billion of Treasury securities to primary dealers, allows the use of collateral, including federal agency debt, federal agency MBS and non-agency triple-A-rated private label residential MBS.

"Anything that helps housing is going to help" the markets and the government-sponsored housing agencies, said Margaret Kerins, U.S. agency strategist at RBS Greenwich Capital in Chicago.

"Liquidity constrained financial institutions have been unable as well as unwilling to lend, so if you can free up that capability it's going to help," she added.

Also, "the broker/dealer community really hasn't been supporting the market, just a lack of risk appetite and a lack of balance sheet, some of the European leveraged fund unwinds put quite a bit of pressure on the market," Kerins said. The lack of participation kept a backstop out of distressed markets, she said.

Most U.S. agency debentures are as much as 12 basis points narrower.

Freddie Mac is on tap to sell $6 billion of notes this week and spread talk has been sliced.

The agency's $3 billion 5-year portion has been launched to yield about 106 basis points over Treasuries, down considerably from 119 basis points on Monday, according to a syndicate source. The $3 billion 2-year note has been launched at a spread of about 79.5 basis points.

Monday's spreads were the widest for short- and intermediate-term issues in the 10-year history of the benchmark and reference note programs.

Prices of agency 30-year MBS with 5-1/2 percent coupons dropped 6/32 to 9/32 compared with the 28/32 loss in 10-year Treasury notes.

Fannie Mae 30-year MBS yielded 5.876 percent, 2.303 percentage points over Treasuries, having closed at a more than 20-year peak of a 2.37-point spread last Thursday.

While the Fed is deepening its pool of acceptable collateral, it is refraining from outright purchases of those securities.

"The Fed came short of buying agency debt and mortgage debt outright," said Kerins. The central bank has "been a fairly large critic of Fannie Mae's and Freddie Mac's retained portfolios over the past decade, really thought that the portfolios posed quite a bit of systemic risk and prefer them to be in the securitization business.