ENVOY MORTGAGE Blog

NEW YORK, Sept 8 (Reuters) - U.S. Treasury prices fell on Monday after the government took control of embattled mortgage giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), easing some of investors' more acute concerns about financial markets and the economy.

The government's move, which could prove to be the world's biggest-ever financial bailout, removed some of the fear that had crept back into markets in recent weeks and had fueled a safe-haven bid for lower-risk bonds. For details, see [ID:nSP327680].

"The Fannie and Freddie move may, hopefully, be the beginning of a first step toward helping to stabilize the market and therefore helping the economy," said John Canavan, analyst with Stone & McCarthy Research Associates in Princeton, New Jersey.

Relief over the Treasury's move to bail out Fannie and Freddie helped push U.S. stocks sharply higher as investors' appetite for higher-risk securities increased.

Bond prices were further undermined by the potential for increased issuance of government debt as a result of U.S. government purchases of mortgage-backed securities under the takeover plan. 

The U.S. Treasury expects to purchase $5 billion of Fannie Mae and Freddie Mac mortgage-backed securities within the next month, in what would be the first taxpayer cash outlays associated with the plan.

"The implicit (guarantee) has become explicit. The Treasury's balance sheet has increased in size and it seems to me that borrowing rates should go up," said Charlie Smith, chief investment officer of Fort Pitt Capital Group in Greentree, Pennsylvania.

Benchmark 10-year Treasury notes <US10YT=RR> were trading 9/32 lower in price for a yield of 3.74 percent, up from 3.71 percent late on Friday. Two-year notes <US2YT=RR> were 4/32 lower for a yield of 2.38 percent, up from 2.32 percent. Bond yields move inversely to prices.

The more acute rise in short-term rates over longer-term rates left the Treasury curve flatter, with the gap between two-year yields and 10-year yields closing to about 136 basis points -- the narrowest since mid-July -- from about 138 basis points late on Friday.

Debt price falls were limited, however, on Monday by continued worries about the overall health of the economy, and whether the Fannie and Freddie bailout would indeed prove any sort of a panacea for the economy.

"The longer-term beneficial impacts to the economy are yet to be seen," Stone & McCarthy's Canavan said.

Indeed, the cost of insuring against the risk of a U.S. government default on its debt rose on Monday, with credit default swaps widening on five-year and 10-year Treasury debt.

Fed funds futures also fell across the 2009 strip , bringing forward the anticipated timing of a Federal Reserve interest rate hike to April from June. 

Let us know your thougts on the mortgage rates issue, economy and the Federal Reserve interest rate hike....