Fannie and Freddie Test Their 25-Year Lows

Updated from 1:12 p.m. EDT.

Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) shares slipped to their lowest levels in more than 25 years on Wednesday, as fear of an imminent government bailout continued to hammer the stocks.

Freddie was recently trading down 21.6%, at $3.27, up from an all-time low of $2.84 hit earlier in the day. Fannie was down 25.6%, at $4.47, but earlier traded at $4.74, the second-lowest level on record, since hitting $4.70 in October 1981.

The government-backed mortgage giants have been struggling through the housing downturn, posting billions of dollars in losses as real-estate prices dropped and investors shied away from the perceived risk of mortgage debt. Those still purchasing Freddie and Fannie bonds may be demanding higher interest payments, if Freddie's offering Tuesday is any indication.

The company managed to sell $3 billion worth of five-year notes in the auction, which was oversubscribed -- perhaps because of the tantalizing yields. The notes were priced 1.13 percentage points above Treasury notes, with a yield of 4.172%, the widest spread Freddie has ever posted on such an offering.

However, spreads on other Fannie and Freddie debt performed an about-face on Tuesday and Wednesday, narrowing sharply as the market shifted into investments that would be better protected than stock if a government bailout does occur. The cumulative decline for both days' offerings was 10.8 basis points for Fannie and 11.1 basis points for Freddie.

"Today's narrowing might reflect the sense that additional government involvement is imminent, involvement that would primarily protect debt holders, not equity holders, most feel," Miller Tabak & Co. analyst Tony Crescenzi, a contributor to RealMoney.com, says in a note Wednesday.

Still, worries about higher borrowing costs surely added pressure to Freddie and Fannie shares. If those costs translate into higher mortgage rates, it could also add more pressure on consumer demand for new homes, further hurting the companies, the housing market and the broader economy.

Freddie spokeswoman Sharon McHale notes that widening spreads are common right now in the risk-averse debt market. Much of the panic is overstated, McHale says, since Freddie's primary guarantee business is "stronger than it has been in a long time."