Fannie, Freddie credit spreads on capital worries

By Dena Aubin and Richard Leong

NEW YORK (Reuters) - The cost of protecting Fannie Mae and Freddie Mac debt with credit default swaps rose on Thursday amid ongoing concerns about their capital, according to data from Markit Intraday.

Five-year credit default swaps on Fannie Mae widened by about 5 basis points to nearly 82 basis points, or $82,000 a year to protect $10 million of debt, while Freddie Mac's swaps widened by about 2 basis points to about 82 basis points.

Concerns about the two major U.S. mortgage finance sources were fanned after former St. Louis Federal Reserve President William Poole was quoted in an interview with Bloomberg as saying the companies are "insolvent" and may need a U.S. government bailout. For details click on.

"If you are going to bail out Bear Stearns, the Congress is going to support Fannie and Freddie," said Andrew Brenner, co-head of structured products at MF Global in New York.

In March, JPMorgan Chase & Co agreed to buy troubled investment bank Bear Stearns Cos at a deep discount, with some nudging from the Fed.

Poole's remarks intensified traders' fears about the financial soundness of Fannie Mae and Freddie Mac.

Anxiety over the creditworthiness of the two government-sponsored enterprises increased the risk premiums on the securities they issue and guarantee.

Yield spreads on bonds issued by Fannie and Freddie expanded by 6 to 7 basis points. They were quoted as much as 12 basis points wider than late Wednesday, analysts said.

Spreads on mortgage-backed securities guaranteed by the two companies widened 6 basis points from late Wednesday.

The early weakness in the agency and MBS sectors spilled into other parts of the bond market. Interest rate swap spreads grew anywhere from 0.50 basis points to 1.50 basis points.