Oct. 27 (Bloomberg) -- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds soared to the highest in more than seven months relative to government notes, potentially boosting home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate bonds and 10-year U.S. Treasuries rose about 21 basis points to 224 basis points as of 4:30 p.m. in New York, data compiled by Bloomberg show. That's up from 162 basis points, or 1.62 percentage point, on Oct. 20.

``It is the deleveraging,'' Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co., said in a Bloomberg Television interview today from Newport Beach, California. ``There are still people who absolutely have to liquidate, and that is keeping a number of the spreads in the high end of the markets much wider than they should be.''

Agency mortgage-bond spreads have fluctuated since their record drops on Sept. 8 after the U.S. seized control of Fannie and Freddie. The spreads have widened on days when concern mounted that buyers relying on borrowed money including banks and hedge funds will have less demand for the debt -- including the past five trading sessions. Spreads have tightened when investors heeded a government pledge to support the market.

While the U.S. vow to support the market, including through increased buying by Fannie and Freddie, is expected to bring down spreads, investors are ``anxious for immediate gratification,'' JPMorgan Chase & Co. analysts led by Matthew Jozoff in New York wrote in an Oct. 24 report.

Credit Crisis

Agency mortgage bonds have returned 77 basis points less than Treasuries so far in October through last week, leaving the debt headed for its worst month since July 2007, according to Lehman Brothers Holdings Inc. index data. The drop coincided with a record fall in foreign central-bank holdings of agency mortgage bonds and so-called agency debt, which includes the corporate borrowing of Fannie, Freddie and U.S. Federal Home Loan Banks.

The widening today came after the dollar last week gained the most in 16 years against the currencies of six major U.S. trading partners as a global economic slowdown spurred demand for the U.S. currency as a haven from losses in emerging markets. ``Improving'' trade balances may cut foreign demand for U.S. agency debt, according to a Credit Suisse Group report on Oct. 24. Central-bank efforts to support currencies can include sales of existing holdings of U.S. dollar assets.

Other debt has suffered more amid a global credit crisis: Investment-grade corporate bond spreads rose to 609 basis points last week, the widest on record, according to Merrill Lynch & Co.'s U.S. Corporate Master index. The spread on Fannie's current-coupon mortgage securities set a 22-year high of 238 basis points in March amid the market turmoil that contributed to the collapse of New York-based Bear Stearns Cos.

Nothing But Treasuries

``All spreads are gapping out, whether it's corporate bonds, investment grade or high-yield: You see it in mortgage debt, asset-backed, commercial-mortgage-backed securities, inflation- linked Treasuries, everything,'' said Jamie Jackson, who oversees government and agency debt trading at Minneapolis-based RiverSource Investments, which manages $90 billion. ``If it's not a nominal Treasury note, nobody wants it.''

The yield on Fannie's mortgage securities has climbed about 43 basis points over the past week to 5.89 percent. The rise suggests an increase of about 40 basis points in new loan rates since Oct. 20, when spreads dropped by the most since Sept. 8 records. The yield is down from a two-month high of 6.09 percent on Oct. 14 because of lower benchmark Treasury yields.

Mortgage Rates

The average rate on a typical 30-year fixed-rate mortgage climbed to 6.08 percent at the end of last week, after falling to 5.92 percent on Oct. 22 from a two-month high of 6.38 percent, according to Bankrate.com data. That compares with as low as 5.72 percent last month.

The increase in mortgage-bond spreads has come as the debt costs for Fannie and McLean, Virginia-based Freddie, the largest holders of their own home-loan securities, again rose to records last week after the companies' regulator sowed confusion over their level of federal support.

The spread on the companies' $1.7 trillion of corporate borrowing first set records two weeks ago when the U.S. announced plans to insure bank debt, offering competing government-backed investments. The increase has affected prices for the $4.2 trillion in mortgage securities guaranteed by Fannie and Freddie, though the companies' buying may continue amid higher funding costs, according to the JPMorgan analysts.

``It is conceivable that the portfolios will expand despite negative arbitrage levels'' partly because the companies are now government-run, their report said.

The difference between yields on Fannie's 5-year corporate debt and similar-maturity Treasuries today expanded by 11.6 basis points to a record 152 basis points, data complied by Bloomberg show. Central banks have been selling the notes in part because of their ``increased preference for the liquidity of Treasuries,'' according to a separate JPMorgan report on Oct. 24 from New York-based analyst Meera Chandan.

Foreign Holdings

Foreign central-bank holdings of agency debt and agency mortgage bonds dropped $47 billion over four weeks to $923.4 billion in the week ended Oct. 22, Federal Reserve data show. The holdings are down from a record $983.9 billion on July 16.

``People have developed a lot more of their own problems in the last six weeks than they had three months ago,'' RiverSource's Jackson said in a telephone interview. ``Countries, really just like banks, need to hold liquidity to prop up their own financial well-being and they're not going to lend that out to other people.''

Bloomberg current-coupon indexes represent the average of yields for the two groups of mortgage bonds with prices just above and below face value, the ones lenders typically package new loans into. The spread helps determine the rates offered to homeowners on new prime mortgages of $417,000 or less in most areas, and up to $729,500 in high-cost counties.

When taking over government-chartered Fannie and Freddie, the two largest U.S. mortgage-finance companies, Treasury Secretary Henry Paulson said that he would direct the firms to increase their $1.5 trillion mortgage-asset portfolios and have his department start buying their home-loan bonds to help lower the cost of home financing.

Ginnie is a federal agency that insures mortgage bonds composed of government-backed loans.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net;

Last Updated: October 27, 2008 16:56 EDT