Stabilizing home prices and unfreezing the mortgage market is the paramount focus of US policy makers. The first significant step in this process occurred with the passage of the Housing bill and the US government now explicitly guaranteeing Freddie Mac (FRE) and Fannie Mae (FNM) backed mortgage securities (also known as Agency MBS or Agency debt) and effectively nationalizing more than 50% of the US mortgage market. What this also means is that Agency MBS are now equivalent to Treasuries in terms of risk profile, which implies that the yield spread between Agency MBS and Treasuries of similar maturity should be close to zero.

As shown in the chart below the current spread is almost 160 basis points which must and will close in short order to a more typical 50 basis points, or if rationality prevails to zero, since for the first time in history the government's guarantee is explicit rather than implicit.