UPDATE 2-FHLBs sell more debt as borrowing costs plunge

(Recasts to add pricing details)

By Al Yoon

NEW YORK, Dec 17 (Reuters) - The Federal Home Loan Bank system on Wednesday said it sold an additional $1 billion of an existing five-year debt issue, following a steep drop in borrowing costs.

The FHLB system, one of the largest providers of funding for U.S. home mortgages, sold its "global" 3.625 percent notes maturing in October 2013 at a 2.274 percent yield, or 0.98 percentage point more than similar U.S. Treasury debt and near the lowest levels on its five-year issue in three months.

The FHLBs -- which make low-cost "advances" to commercial banks as well as savings and loans -- have benefited since late November when the Federal Reserve announced plans to purchase up to $100 billion in so-called federal agency debt to support mortgage-related markets.

Agency debt also includes unsecured issues of Fannie Mae (FNM.P: Quote, Profile, Research) and Freddie Mac (FRE.P: Quote, Profile, Research), which pulled back from issuing debt as their borrowing costs rose.

The Fed, in slashing its target interest rate to near zero on Tuesday, said it could expand its plans to buy agency debt and up to $500 billion in mortgage-backed securities (MBS) as conditions warrant.

Stronger demand and reduced yields for agency and mortgage debt allows lenders to offer lower rates on loans to consumers, a key Fed strategy to stabilizing the housing market.

Yield premiums on the existing FHLB five-year notes earlier on Wednesday dropped to 0.94 percentage point above comparable Treasuries, according to TradeWeb. The spread is down from 1.04 percentage points on Tuesday and a record 1.94 percentage points on Nov. 20, according Reuters Pricing Service.