Fannie Mae, Freddie Mac debt soars on takeover talk

By Al Yoon

NEW YORK (Reuters) - Debt of Fannie Mae and Freddie Mac soared in their best one-day gain in history on Friday amid speculation that a government takeover of the housing giants would make the bonds more like ultra-safe U.S. Treasuries.

The prospects, sparked by deep consternation over the ability of the companies to survive on their own and a New York Times report saying the government is mulling a takeover, caused investors to flee the companies' stock, which some analysts said could be left worthless.

Investors were selling shares of the congressionally chartered companies and buying their debt, which if assumed by the government would be seen as safe as Treasury bonds, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York.

Yield spreads on the corporate "federal agency" debt of the companies tightened as much as 29 basis points for five-year issues, according to broker GovPX/Garban-ICAP. The gapping eased to about 20 basis points, to 0.8 percentage point above Treasury notes, marking "unbelievable" shifts in a market that typically sees 1 to 2 basis point daily moves, a trader at a top-five bond dealer said in an e-mail.

It was the most extreme narrowing of yield spreads ever, UBS Securities said in a report.

"There's a closer linkage today with Fannie, Freddie and the U.S. government than ever before," said Jim DeMasi, chief fixed income strategist at Stifel Nicolaus & Co. in Baltimore. "It's a credit-quality upgrade."

But that also means a credit-quality downgrade for U.S. Treasury debt, which slumped, investors said.

The health of Fannie Mae and Freddie Mac is seen as synonymous with the U.S. housing market since they own or guarantee more than $5 trillion in mortgages. The companies hold charters from Congress to raise money from investors by purchasing home loans and pooling them into mortgage-backed securities. They also have massive investment portfolios of home loans and MBS.