June 27 (Bloomberg) -- Yields on agency mortgage securities relative to U.S. Treasuries rose for the sixth day out of seven, reaching the highest since March 14, as spreads rose on competing investments amid concern that the economy is weakening, according to data compiled by Bloomberg.

The difference between yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 2 basis points, to 191 basis points. The spread has climbed 16 basis points since June 18.

Forced bond sales in March by funds using borrowed money helped drive the spread to a 22-year high then and contributed to the collapse of Bear Stearns Cos. Today, investors are demanding higher spreads amid concern about the economy and on speculation that some banks are reducing holdings as the quarter ends to make up for capital-depleting losses or to reduce reported leverage.

``Mortgages have cheapened over the past week in line with the widening cross spread products reflecting an increase in economic uncertainty,'' Credit Suisse Group analysts in New York including Chandrajit Bhattacharya and Mukul Chhabra wrote in a June 25 report.

Yields over benchmarks on the safest types of AAA rated commercial-mortgage bonds rose yesterday to the highest since April 14.

Simple spreads between 10-year Treasuries and securities backed by Washington-based Fannie Mae reached 238 basis points on March 6. An increase boosts the cost of new mortgages for the most creditworthy consumers. ``Super-senior'' commercial-mortgage bond spreads over 10-year swap rates have climbed 48 basis points since June 18 to 192 basis points, compared to a record 312 basis points on March 10, according to Bank of America Corp. data.

Agency Bonds

Agency mortgage securities are guaranteed by government- chartered Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae. A basis point is 0.01 percentage point.

Fixed-rated agency mortgage bonds returned 91 basis points less than Treasuries with maturities similar to their expected lives this month through yesterday, according to Lehman Brothers Holdings Inc. index data.

The so-called option-adjusted spread of fixed-rate agency mortgage securities has risen 13 basis points since June 18, to 130 basis points yesterday, according to Lehman data. An option- adjusted spread takes into account the impossibility of knowing when the underlying mortgages will be paid off. Simple yield spreads also don't reflect that borrowers pay down principal both sooner and later than the bonds' average lives.

Congress created Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, to expand homeownership by increasing mortgage financing and provide market stability. Ginnie Mae guarantees securities backed by government-backed loans.

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 other high-cost counties.

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

Last Updated: June 27, 2008 10:23 EDT