June 8 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities climbed to their highest since Nov. 24, the day before the Federal Reserve announced plans to buy the bonds to drive down interest rates on new home loans.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 0.15 percentage point to 5.05 percent as of 4 p.m. in New York, according to data compiled by Bloomberg. That’s up from 3.94 percent on May 20.

Yields on the securities rose faster than rates on benchmark Treasuries today because the U.S. central bank hasn’t taken action in response to soaring home-financing costs, which the Fed has been influencing through debt purchases in a bid to stabilize the housing market, said Walt Schmidt, a mortgage-bond strategist at FTN Financial in Chicago.

“The fact that the Fed has not come in and supported the ‘national mortgage rate,’ that has gotten the market spooked,” Schmidt said in a telephone interview today.

Crashing U.S. home prices have fueled the first global recession since World War II, and longest U.S. recession since the Great Depression. The Fed, led by Chairman Ben S. Bernanke, has watched signs of an easing economic downturn work against his bid to lead the nation out of it through lower borrowing costs.

Reviving investor confidence and concern that the expansion of the central bank’s balance sheet would fuel later inflation have sent yields on 10-year U.S. Treasury soaring, from as low as 3.09 percent last month to 3.9 percent today, according to Bloomberg data. Mortgage-bond yields held in a range through late last month before jumping more than one percentage point, after confidence in the Fed’s buying program wavered.

Gaining Back Ground

Yields on the Fannie Mae securities have now retraced most of their decline from 5.41 percent on Nov. 24. Changes in typical mortgage rates usually match increases or decreases in yields, though they can deviate depending on competition and capacity among lenders for origination volumes.

The difference between yields on the Fannie Mae bonds and 10-year Treasuries widened 0.07 percentage point today to 1.14 percentage points, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.7 percentage point on May 22, the lowest since 1992.

Last week, the Fed said it bought a net $25.8 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds in the week ended June 3, compared with a weekly average of $24.1 billion since the initiative began in January.

The Fed initially said on Nov. 25 that it would buy as much as $500 billion of so-called agency mortgage securities, before announcing in March that it would expand the program to as much as $1.25 trillion, as well as buy $300 billion of Treasuries.

Rising Mortgage Rates

The average rate on a typical 30-year mortgage jumped back to 5.29 percent in the week ended June 4, the highest since December and up from a record low of 4.78 percent in April, according to McLean, Virginia-based Freddie Mac.

The Fed’s mortgage-bond purchases will likely slow, not increase, according to Wachovia Capital Markets LLC debt analysts led by Glenn Schultz in Charlotte, North Carolina.

That’s partly because its bid to hold down loan costs is meeting with “limited success” and partly because “if it tries too hard, we believe the Fed could create a situation in which the private market has a harder time adjusting once government support is withdrawn,” they said in a June 5 report.

The analysts predicted spreads on home-loan securities will continue widening, and that “the housing market likely can withstand modest increases in mortgage rates and still sustain its recovery,” based on measures of the affordability of homes for buyers at current prices and loan rates.

Hurdles Remain

The market still faces challenges. Additional U.S. home foreclosures will probably total 6.4 million by mid-2011, about 2.5 million less than if mortgages weren’t being reworked to aid borrowers, according to JPMorgan Chase & Co. analysts.

The modification-adjusted number, from a starting point of March, will lessen home-price declines “only slightly,” the mortgage-bond analysts led by John Sim in New York wrote in a June 5 report. Instead of falling 41 percent from their peaks, U.S. prices will probably drop 39 percent on average, they said.

Completed foreclosures totaled 861,664 last year, up from 404,849 in 2007, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. In the first four months of this year, they totaled 276,526.

Home prices in 20 major metropolitan areas have fallen 32 percent through March from a July 2006 peak, according to an S&P/Case Shiller index. The unemployment rate reached a 25-year high of 9.4 percent in May, according to the Labor Department.

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

Last Updated: June 8, 2009 18:36 EDT