Oct. 14 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac corporate debt rose to records relative to Treasuries as the government said it would guarantee borrowing by banks, providing bond buyers with competing U.S.-backed investments.

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries rose 15.8 basis points to 118.2 basis points as of 3:35 p.m. in New York, according to data complied by Bloomberg.

As part of U.S. plans announced today to halt a credit freeze, the Federal Deposit Insurance Corp. will fully guarantee newly issued, senior unsecured debt from some banks. The bank notes initially will probably carry yields greater than those on Fannie and Freddie's $1.7 trillion of debt, reducing demand for so-called agency bonds, said Jim Vogel, an analyst at FTN Financial Group.

``This is a major shift investors will have to digest,'' Vogel, the head of agency debt research at FTN in Memphis, Tennessee, wrote in an e-mail.

The FDIC's coverage applies to all senior unsecured debt issued by certain banks on or before June 30, 2009. The largest seller of U.S. agency debt is the Federal Home Loan Bank system, the series of 12 cooperative lenders owned by U.S. financial companies. A basis point is 0.01 percentage point.

The government is directly helping banks refinance by agreeing to guarantee new securities amounting to 125 percent of the debt they have maturing through June 30. That would enable banks to sell $12.5 billion of debt backed by the U.S. for every $10 billion they have coming due.

Conservatorship

Fannie and Freddie, the mortgage-finance companies that own or guarantee almost half of the $12 trillion of U.S. residential debt, were placed into a government-run conservatorship last month following losses that pushed foreign debt buyers to retreat from their securities.

The U.S. at the time vowed to inject as much as $200 billion of capital into the firms to support their corporate borrowing and more than $4.2 trillion of home-loan bonds they guarantee.

``It's a not a credit-related issue,'' Gary Cloud, a senior portfolio manager who helps oversee $500 million at the AFBA Funds in Kansas City, Missouri, said in a telephone interview. ``There's nothing that has fundamentally changed.''

Investors may also be concerned that an increase in supply of Fannie and Freddie debt may hit the market, following reports that the U.S. has directed the companies to buy $40 billion a month of subprime and Alt-A mortgage securities, Cloud said.

``How do they do that? They don't waive their wand,'' Cloud said. ``They sell bonds to raise cash to buy the securities.''

The difference between yields on McLean, Virginia-based Freddie's five-year debt and similar-maturity Treasuries rose 18.1 basis points to 124.2 basis points.

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

Last Updated: October 14, 2008 16:00 EDT