Aug. 18 (Bloomberg) -- Fannie Mae and Freddie Mac debt yields versus Treasury notes soared to the highest since March, as the U.S. government reiterated that it doesn't plan to use new authority to bail out the mortgage-finance companies.

The difference between yields on Washington-based Fannie's 5-year debt and 5-year Treasuries widened 7.5 basis points to 103 basis points at 4 p.m., the highest since March 17, data complied by Bloomberg show. A basis point is 0.01 percentage point. In the decade before 2008, the spread averaged 43 basis points.

Fannie fell 22 percent in New York trading, while Freddie tumbled 25 percent after Barron's said the Bush administration anticipates the government-chartered companies will fail to raise the capital they need to offset losses, leading Treasury Secretary Henry Paulson to exercise the authority granted to him last month to fund the companies if needed.

``Everybody's taking a step back and saying, `Will Paulson step in?''' Margaret Kerins, the managing director of agency debt strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a telephone interview. ``There's so much uncertainty as to the circumstances under which the plan would be used and then how the government would act, that it's forcing people to the sidelines.''

The companies have been battered by record delinquencies and rising losses amid the worst housing slump since the Great Depression, posting four straight losses totaling $14.9 billion. Fannie has raised $14.4 billion in new capital since December to offset credit losses. McLean, Virginia-based Freddie, which sold $6 billion in preferred stock in November, is struggling to raise $5.5 billion more the company said in May it planned to sell.

Fannie shares fell $1.46 to $4.39 in New York Stock Exchange composite trading today, while Freddie declined $1.76 to $6.15. They've each plunged more than 84 percent this year.

Paulson's Powers

As part of a housing law signed last month, Paulson has the ability to make unlimited purchases of the shares and debt of Fannie and Freddie under some circumstances. Paulson can use the powers if he deems action necessary to provide stability to the financial markets, prevent disruptions in the availability of mortgage finance and protect taxpayers, according to the law.

``As the Secretary has said, we have no plans to use these authorities,'' a Treasury spokeswoman, Jennifer Zuccarelli, said today, responding to the Barron's article.

Investors say that until the companies' capital level are shored up ``and other spread products stop widening, there is no reason to believe agencies can't drift or move cheaper,'' Jason Volk, a trader at Lehman Brothers Holdings Inc. in New York, wrote in a note to clients today.

Buyers also fled the companies' debt versus interest-rate swaps, another benchmark. Yields on Fannie Mae's 5-year bonds reached 1.8 basis points less than 5-year swap rates, the highest since July 10, according to Bloomberg data.

Freddie today sold $4 billion of short-term notes in three maturities in a weekly auction that attracted less interest from investors than last week, though on some of the debt produced lower yields over benchmarks than in recent sales.

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

Last Updated: August 18, 2008 16:26 EDT