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MBS Spreads Widen as GSEs Downgraded

Agency spread widens 3 BPS

Aug. 8, 2011

By staff

Following the downgrade to ratings on U.S. debt, ratings for Fannie Mae and Freddie Mac were downgraded -- driving the cost of mortgages up relative to Treasury yields. But the decline in Treasury yields has so far outpaced the widening spread -- leaving mortgage rates poised to set more records.

On Friday, Standard & Poor's Ratings Service downgraded the country's long-term sovereign credit ratings to AA+ from AAA.

With the lowered U.S. ratings came a downgrade to government-related securities.

In addition, the senior issue ratings on Fannie and Freddie were cut to AA+ from AAA.

"The downgrades of Fannie Mae and Freddie Mac reflect their direct
reliance on the U.S. government," S&P stated."

The negative ratings activity pushed the spread between Fannie's current-coupon 30-year fixed-rate mortgage-backed securities and the 10-year Treasury yield 3 basis points wider to 111 BPS during midday trading, Bloomberg reported. The spread, which finished June at 87 BPS, was at its widest level since June 2009.

Still, even with the 3-basis-point widening, the 2.36 percent yield on the 10-year Treasury was trading around 22 BPS less than Friday's close of 2.58 percent based on Department of the Treasury data and market data from

Freddie Mac had the average 30-year fixed-rate mortgage at 4.39 percent Thursday. Since then, the 10-year yield has fallen 11 BPS. That puts the 30-year mortgage in the range on 4.30 percent.

Historical data from Freddie indicates that the lowest 30 year on record is 4.17 percent during the week ended Nov. 11, 2010.

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