Fannie, Freddie debt narrows before vote

NEW YORK (Reuters) - Risk premiums on debt issued by Fannie Mae and Freddie Mac narrowed before a widely expected vote in the House of Representatives to approve a sweeping rescue plan for the two housing finance companies.

President George W. Bush said he would sign the housing bill into law, despite objections to certain provisions, because legislation is urgently needed to address the housing crisis.

Yield spreads on agency debentures issued by the two federally-chartered, shareholder-owned companies shaved roughly 2 basis points to 5 basis points early on Wednesday.

"It gives support for their debt structure. It makes it easier for them to raise capital," said Priya Misra, interest rate strategist at Lehman Brothers.

Fannie Mae and Freddie Mac mortgage-backed securities (MBS) also outperformed Treasuries, with prices of 5-1/2 percent and 6 percent 30-year securities off 3/32 compared with the 8/32 drop in 10-year Treasury notes.

The plan that includes higher credit lines to the Treasury and access to relatively low-cost funding if needed is aimed at bolstering Fannie Mae and Freddie Mac when the government is heavily relying upon them to keep buying mortgages and stabilize the worst housing market since the Great Depression.

Shares of the two federally chartered companies rose at the start of trading on expectations of approval by the U.S. House of Representatives. Freddie Mac shares rose more than 7 percent and Fannie Mae shares were up more than 12 percent.

Fears that the federally chartered companies lacked sufficient capital had driven their shares to 17-year lows before the prospects of Congressional action on the rescue plan improved.

The government plan "can be successful once investors believe backstop support can break Fannie Mae and Freddie Mac obligations from the housing distress trading spiral," FTN Financial analyst Jim Vogel, in Memphis, Tennessee, said in a client note.