Continuing a run that led excess returns of MBS over Treasuries to post their best month in over 10 years during April, U.S. mortgage-backed securities continued to tighten against Treasuries on Wednesday — despite news of a large loss by Fannie Mae (FNM: 27.81, +0.65%). The trend is likely to mean better mortgage rates for conforming borrowers, sources told Housing Wire Thursday.

Fannie Mae said Tuesday that it lost $2.2 billion during the first quarter — news that might have otherwise sent agency MBS yields soaring — but news from the Office of Federal Housing Enterprise Oversight that saw it lift a 2006 consent order and announce further reductions to capital constraints at the GSE led investors to continue their bullish run.

Via Reuters:

“The market has reacted very well to the news from OFHEO, and while there has not been one big buyer of mortgage bonds there has been buying from pretty much every investor base,” said Arthur Frank, director and head of MBS research at Deutsche Bank Securities in New York.

“A lot of investors feel that even if Fannie Mae is losing money on its old book of business, it will be making solid profits on its new book of business,” he said.

On Wednesday, the yield premium on Fannie Mae 5.50s relative to the 10-year Treasury note moved to 1.45 percentage points, narrowing the spread by 25 basis points. Bond yields move inversely with bond prices.

Wednesday’s close was the most expensive Fannie’s MBS has been since January, Reuters noted, a sharp contrast from mid-march, when the same yield spread reached as high as 258 basis points — the widest such spread in more than 20 years.

HW’s Linda Lowell covered market technicals yesterday; for those looking to get a sense of what’s trading right now and what strategies investors should be considering, click here.

Disclosure: The author held no positions in FNM when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.