MORTGAGES/AGENCIES-Debt lags Treasury rally ahead of Fannie Q2

By Lynn Adler

NEW YORK, Aug 7 (Reuters) - Debt issued by U.S. home funding agencies including Fannie Mae and Freddie Mac sharply lagged the Treasury market rally on Thursday on concerns that Fannie's second-quarter results on Friday will stoke housing and mortgage market woes.

Risk premiums on agency-issued debt gaped wider, furthering the move seen after Freddie Mac on Wednesday reported a worse-than-expected second quarter loss and forecast deeper housing and credit problems.

Demand for safer assets siphoned demand away from mortgage bonds and agency notes, fueling a Treasuries rally that swept 10-year notes US10YT=RR 1-5/32 higher for a 3.92 percent yield.

"If you just dial back a few months to the February-March time period I think investors really thought that the GSEs were certainly going to be more of the solution than the problem in the mortgage market, and then that kind of degenerated somewhat," Moshe Orenbuch, analyst at Credit Suisse in New York, said on a conference call on Thursday.

In the agency note sector, yield spreads mostly widened by 2 to 4 basis points after increasing by 1 to 3 basis points on Wednesday.

Freddie Mac (FRE.N) and Fannie Mae (FNM.N) 6 percent 30-year MBS gained 14/32, far less than Treasuries.

"Their spread relative to Treasuries has increased by about 40 basis points over the last couple of months and that gets translated into higher mortgage rates," Orenbuch said on the call.