Yields relative to government notes on Fannie Mae, Freddie Mac, and the Government National Mortgage Association mortgage-backed securities tumbled Tuesday to the lowest since October 2007 after the Federal Reserve Board began a $500 billion program to buy the bonds.

The difference between yields on Fannie's current-coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries had tightened by about 24 basis points, to 133 basis points, as of 10:20 a.m. in New York.

Andrew Brenner, a co-head of structured products and emerging markets in New York at MF Global Inc., wrote in a note to clients that the Fed may have bought $4 billion of agency mortgage bonds Monday in its first use of a program aimed at lowering home loan rates, and there was investor speculation the Fed had been buying more Tuesday.

The Fed has said it plans to purchase $500 billion of securities by June 30.

UBS AG analysts led by William O'Donnell in Stamford, Conn., wrote in a report published Tuesday that the program will soak up about $162 billion more than the expected growth of the type of securities being targeted.

"This increased demand combined with minimal supply should have a positive effect on" the spreads between agency mortgage bonds and benchmarks, the UBS analysts wrote.

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