Sept. 11 (Bloomberg) -- Yields on $4.2 trillion of mortgage bonds guaranteed by Fannie Mae and Freddie Mac rose for the third day relative to U.S. Treasuries as concern that Lehman Brothers Holdings Inc. and Washington Mutual Inc. may fail undermined Treasury Secretary Henry Paulson's support.

The difference between yields on Fannie's current-coupon 30- year fixed-rate securities and 10-year Treasuries widened 2 basis points to 162 basis points as of 12:10 p.m. in New York, data compiled by Bloomberg show. The spread has widened 8 basis points after narrowing a record 40 basis points on Sept. 8, the day after the government took over Fannie and Freddie.

Concern that financial companies' capital-depleting losses would lead them to slow debt purchases or sell assets drove the spread to a 22-year high in March and back toward that level last month, boosting mortgage rates. Lehman Brothers, the fourth- largest securities firm, plummeted after Moody's Investors Service said it may face a credit-rating cut, and Washington Mutual, the largest U.S. savings and loan, tumbled on concern the lender may need to raise new capital.

``Any time you see distressed situations you've got to reevaluate your own risk,'' said Tom Graf, the director of structured products at Boston-based Standish Asset Management Co., part of Bank of New York Mellon Corp.'s asset management unit, which oversees $200 billion in fixed-income assets. ``If another broker-dealer or a bank that's also a securities dealer goes down, there's one less source of liquidity.''

The U.S. government on Sept. 7 put Fannie and Freddie into conservatorship after their losses threatened to further disrupt the housing market. Paulson committed to invest as much as $200 billion in preferred stock, extend credit and protect the companies' debt and mortgage-backed securities. The Treasury will also increase the companies' holdings and buy mortgage bonds.

Mortgage Bond Prices

A rise in Fannie and Freddie mortgage-bond prices above face value may also have triggered selling by Asian investors and banks, William Chepolis, who oversees $9 billion of bonds as a fixed-income fund manager at DWS Investments, said yesterday.

Washington-based Fannie's 5.5 percent mortgage bonds, the coupon with the largest outstanding amount, rose to about $101.20 per $100 dollar of principal on Sept. 8, from $99.06 on Sept. 2, before falling to $100.75 today, Bloomberg data show.

Because increases in consumer refinancing can hurt investors who buy the securities above $100 by erasing debt for which they paid a premium, Asian investors ``much prefer to buy them at a discount,'' said Chepolis, who's based in New York. The spread will probably eventually narrow below the level reached four days ago, he added.

The yield on Fannie's current-coupon mortgage bonds rose to 5.27 percent, from 5.21 percent on Sept. 8, suggesting mortgage rates may rise. A basis point is 0.01 percentage point.

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.

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

Last Updated: September 11, 2008 13:05 EDT