Aug. 25 (Bloomberg) -- Freddie Mac rose 17 percent in New York trading after a $2 billion sale of short-term debt stoked confidence the second-largest U.S. mortgage-finance company can still attract investors.

Freddie, based in McLean, Virginia, received increased demand for the debt compared with a similar sale last week, though paid higher yields relative to benchmarks. Shares in Washington-based Fannie Mae, the largest mortgage-finance company, rose 3.8 percent.

Government-chartered Fannie and Freddie have fallen more than 90 percent this year amid concerns the U.S. may need to rescue them in a bailout that would wipeout shareholders. If Fannie or Freddie were unable to refinance debt, it might force the U.S. to act, Moshe Orenbuch, an analyst at Credit Suisse, said.

``The prices are ridiculously depressed,'' Charles Lieberman, chief investment officer of Advisors Capital Management, said in an interview with Bloomberg Television.

Freddie Mac sold $1 billion of three-month notes at a yield of 2.58 percent, the company said today. That translates to about 90 basis points more than similar-maturity U.S. Treasuries and 23 basis points less than the three-month London interbank offered rate. The spreads from last week's sale were 61 basis points over Treasuries and 32 basis points below Libor, according to Stone & McCarthy Research Associates.

The company also sold $1 billion of six-month debt at a yield of 2.858 percent, a spread of about 92 basis points above Treasuries and 25.5 basis points below Libor; compared with 80 basis points and 32 basis points last week. A basis point is 0.01 percentage point.

Paulson's Power

Freddie rose 48 cents to $3.29 at 4:02 p.m. in New York Stock Exchange composite trading. Fannie gained 19 cents to $5.19.

U.S. Treasury Secretary Henry Paulson last month was granted the power to pump unlimited capital into Freddie and larger competitor Fannie Mae in a bid to restore confidence in the money-losing companies. The Treasury has said it doesn't plan to use the authority.

Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the companies and data compiled by Bloomberg.

Yield spreads on bonds including agency debt sold by Freddie and Fannie, securities backed by government-insured student loans and U.S.-guaranteed mortgages bonds have been driven wider since mid-2007 in a credit-market slump sparked by losses on home-loan bonds tied to the least creditworthy homeowners.

Investors bid for 3.95 times the amount of three-month securities on offer from Freddie today, compared with 2.19 times last week. The bid-to-cover ratio on the six-month securities was 3.42 times, up from 2.42 times.

Congress created Freddie and Fannie to expand homeownership by increasing mortgage financing and to provide market stability. The companies make money by holding mortgage assets and on guarantees of mortgage-backed securities they create out of loans from primary lenders.

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

Last Updated: August 25, 2008 16:23 EDT