Fannie, Freddie debt soars on government takeover

By Lynn Adler

NEW YORK (Reuters) - Fannie Mae and Freddie Mac debt soared early Monday, hours after the U.S. government's takeover of the two troubled U.S. home funding companies gave explicit backing to their securities.

Confidence engendered by the government's bailout on Sunday spread to other financial products, including some of the riskier mortgage bonds that triggered the U.S. housing meltdown.

Risk premiums on agency-issued debt snapped tighter following the government's draconian action to seize control of Fannie and Freddie, with the aim of stabilizing the worst U.S. housing market since the Great Depression and boost confidence in global financial markets.

"This is the biggest event in my 21 years in the business," said Arthur Frank, director and head of MBS research at Deutsche Bank Securities in New York.

The market was heartened by the plan for Treasury to buy Fannie and Freddie mortgage-backed securities.

"Today's tightening is definitely one of the most, if not the most, tightening the market has ever seen," Frank said. "Demand is coming from both domestic and overseas investors."

Most U.S. agency note and mortgage bond spreads sliced away more than 20 basis points on the clear confirmation that Fannie and Freddie debt is government-backed.

China and Japan, the biggest buyers of Freddie Mac and Fannie Mae bonds, on Monday praised Washington for rescuing the troubled mortgage titans, bolstering market confidence about ongoing foreign investment in these securities.