Big bond investors say Fed plan works -- for now

By Jennifer Ablan

NEW YORK (Reuters) - The Federal Reserve's move to unfreeze panicky U.S. credit markets failed to assuage bond investors, with some of the biggest fixed-income investors braced for further credit deterioration in the market.

On Tuesday, the Fed said it will lend up to $200 billion of Treasury securities to banks for 28-day periods in return for debt including a range of mortgage-backed securities -- the root of the current credit crisis -- as collateral.

That news did send the yield premium on Fannie Mae MBS down 15 basis points to 2.151 percentage points over comparable Treasuries, but not before it hit its widest level in more than 20 years on Thursday, at 2.37 percentage points.

Mounting foreclosures and defaults along with further rating downgrades remain the clear and present danger.

"The negative fundamentals are very much intact for delinquencies and foreclosures, and the selling pressure from leveraged investors still looms large over the market," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion.

To the shock of many investors, and evidently Fed policy makers, mortgage-backed securities, known as some of the least volatile and safest securities, had been under severe selling pressure until Tuesday.

Over the last week alone, banks and hedge funds stripped of access to credit have had to sell these mortgage securities to raise cash for margin calls, which have consequently created somewhat of a "systemic" liquidity squeeze.

But the Fed action on Tuesday may mark a short-term bottom after some six straight weeks of "outright brutality," said Gundlach, who is also one of the biggest MBS investors.