U.S. Treasuries' debt protection costs jump to record

NEW YORK (Reuters) - The cost to insure U.S. Treasury debt against default surged to a record on Friday on fears that the U.S. government may need to put capital into mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N, adding to government debt levels.

Investors are worried about increased Treasury debt supply after a report that the U.S. government may be considering a takeover of the country’s two biggest mortgage finance companies.

The cost to insure Treasury debt with credit default swaps jumped to 16.5 basis points, or $16,500 per year for five years to insure $10 million in debt, from 8 basis points on Thursday, an analyst said.

Credit default swaps are used to buy protection against the likelihood of a borrower defaulting on its debt and to speculate on an issuer’s credit quality. Protection costs rise when people become more concerned about an issuer’s credit quality.

The 10-year Treasury note was trading 1-1/32 lower in price for a yield of 3.93 percent, up from 3.80 percent late on Thursday, while the 2-year note was 8/32 lower to yield 2.55 percent, up from 2.41 percent.

Debt protection costs on U.S. government debt are now higher than those for Germany, which trades at 9.5 basis points, and are trading at similar levels as Japan and the United Kingdom, which are around 16.5 basis points, the analyst said.

Reporting by Karen Brettell; editing by Gary Crosse