A US Treasury Department spokeswoman said on Thursday that rumours about a possible new government guarantee for mortgage lenders Fannie Mae and Freddie Mac were totally unfounded. The rumours had earlier swept through financial markets, driving down prices for US Treasury debt securities that have been seen as a safe-haven investment amid current credit-market turmoil.
Treasury prices later rebounded as news spread that the US Treasury denied the rumours. A Freddie Mac spokeswoman also had denied knowledge of a government plan to offer a backstop for the mortgage lenders.
Even if such a move was contemplated, it likely would require a change in laws that would be cumbersome and time-consuming. Nonetheless, the rumours jolted markets that are once again struggling and threatening to freeze up despite repeated injections of liquidity from central banks around the world.
At the heart of the market's problems is the continuing decline in US housing markets stemming from a meltdown in so-called subprime mortgage lending to poorer-quality borrowers.