Sectors mixed as varied factors weigh

By Julie Haviv

NEW YORK (Reuters) - Yield spreads on Fannie Mae and Freddie Mac U.S. mortgage-backed securities widened against Treasuries on Tuesday, while "federal agency" debt tightened, as market participants mulled the impact of Federal Reserve purchases against lofty prices.

The regular buying by the Federal Reserve has been the biggest positive for agency MBS and agency debt securities, but it has also inflated prices to high levels.

"The MBS market has been trading well lately, if slightly at the richer end of the range," said Todd White, portfolio manager at RiverSource Investments, who is based in Minneapolis, Minnesota.

"Net supply is down considerably and the federal government continues to buy MBS," he said.

So, while spreads currently may not look attractive on a strictly historical basis, implied volatility is down and prepayments continue to be insignificant, he said.

Refinancing activity, which has been subdued, can affect prepayment speeds, key factors that investors use to determine the value of mortgage bonds. If prepayment speeds rise or fall too quickly, they hurt returns on mortgage securities.

RiverSource continues to be overweight on MBS, particularly the higher coupons, rather than the 30-year 4.00 percent and 4.50 percent coupons, he said.

RiverSource Investments has about $93 billion in fixed-income assets under management.