UPDATE 1-Solid GSE bill sales hint at investor confidence

(Adds Freddie bill results, quote, background, byline)

By Richard Leong

NEW YORK, July 30 (Reuters) - Solid demand for $4 billion of bills sold by Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) on Wednesday suggests growing confidence among investors in the two U.S. government-sponsored mortgage finance enterprises.

The bill sales came shortly after President George W. Bush signed into law a housing rescue package. Key provisions include expansion of a temporary line of U.S. Treasury credit to the GSEs and gives the government the option to purchase shares in them if they falter. For more, see [ID:nN30428711]

Proponents of the rescue package contend the survival of Fannie Mae and Freddie Mac is vital to help turn around the ailing housing market. The two companies hold or guarantee nearly half of the $12 trillion in outstanding U.S. mortgages.

"The bill sales showed things are settling down. It means there's more confidence with the GSEs especially with the housing bill passing," said Nancy Vanden Houten, agency analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

Fannie Mae on Wednesday auctioned $2 billion of 3-month bills and $1 bill of six-month bills, while its smaller sibling Freddie Mac sold $1 billion of 1-month bills.

This month, Fannie Mae and Freddie Mac bill rates and risk premiums on their corporate debt jumped on fears over their ability to raise capital in the face of growing mortgage losses due to the prolonged housing slump.

A sustained increase in bill rates and risk premiums would pose greater borrowing costs for the GSEs and reduce their flexibility to raise capital.