Spreads sharply tighter on Fed liquidity plan

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

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

Most U.S. agency debentures are as much as 13 basis points narrower.

Prices of agency 30-year MBS with 5-1/2 percent coupons are unchanged to yield 5.813 percent, in contrast with the 1-3/32 loss for 10-year Treasury notes.

The yield premium narrowed to 2.223 percentage points from 2.287 points late Monday, which was just shy of the 2.37-point spread last Thursday that was the highest closing yield premium in more than two decades.

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.

(Reporting by Lynn Adler; Editing by Kenneth Barry)