The difference in yield between agency mortgage securities and government notes fell to the lowest level in more than 17 years Wednesday, as the Federal Reserve's program to purchase $1.25 trillion of home-loan bonds bolsters the market.

The yield spread between Fannie Mae's current-coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries narrowed by about 1 basis point, to 66 basis points, as of 10:31 a.m. in New York.

The spread has narrowed 9 basis points since the Treasury's Dec. 24 announcement of its expanded capital backstop and portfolio limits for Fannie and Freddie Mac. The Fed's buying continues amid a decline in new supply reflecting lower home loan applications.

The Fed's average weekly purchases of agency mortgage securities have slowed to $15.8 billion since October, the month after the central bank said it planned to spread them over an additional three months, instead of completing them by Dec. 31.

Yields on agency mortgage bonds have been guiding rates on almost all new home lending since the collapse of the nonagency market in 2007 and a retreat by banks.

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