Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home loan rates fell to the lowest in three weeks relative to Treasuries, as debt investors sought safer assets.

Fannie Mae's current-coupon 30-year fixed-rate mortgage bonds narrowed 0.03 percentage point, to 0.79 percentage point more than 10-year Treasuries, as of 10:33 a.m. Tuesday in New York, the lowest since May 19.

The gap reached a seven-month high of 0.93 percentage point on May 24 as Europe's sovereign debt crisis roiled markets.

Agency mortgage bonds look attractive because they carry little credit or currency risk, loan refinancing is limited and supply-and-demand factors remain "very favorable" amid "very low" net issuance and U.S. trade deficits that help stoke foreign investors' interest, JPMorgan Chase & Co. analysts wrote in a weekly report. Yields on the Fannie securities reached a seven-month low Monday.

"The absolute level of yields is clearly not attractive," the analysts, led by Matthew Jozoff, wrote in the June 4 report. "But, as we've heard from a number of investors, what's the alternative?"

Mortgage refinancing could boost the supply of mortgage bonds trading near face value and cause losses for investors buying securities for more than par. That risk, though, is being muted by "capacity constraints in the system" that have widened the gap between yields on home loan securities and mortgage rates, they wrote.

Mortgage companies aren't lowering rates as much as they would have before, because "the financial crisis has eliminated much of the correspondent and broker lending in the system," reducing competition, the analysts wrote.

The average rate on a typical 30-year fixed-rate mortgage fell to 4.79% in the week that ended June 3, the lowest since December and near the record of 4.71% reached that month. This year's high of 5.21% occurred in early April.

Yields on Fannie securities rose less than 0.01 percentage point, to 3.97 percentage points Tuesday, down from 4.67 on April 5.

The Federal Reserve's $1.25 trillion of purchases of agency home loan bonds helped narrow the spread on the Fannie securities to a record low of 0.59 percentage point on March 29, two days before the program ended.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.