Bonds of Fannie Mae and Freddie Mac, the biggest providers of American mortgage money, will retain their value relative to Treasury debt after the presidential election next week, according to Merrill Lynch & Co.

The so-called agency bonds will outperform Treasuries if Senator Kerry wins and upends the Bush administration’s “refusal to yield any ground on key issues” in the creation of a new regulator for Fannie Mae and Freddie Mac, said an analyst at Merrill, Rajiv Setia. A re-election of President Bush would keep the status quo outlook on the bonds, leaving them unchanged, he said in a research report dated yesterday.

Chances for legislation targeting the companies in 2005 are still “relatively high,” given the bipartisan views that a stronger regulator is needed, Mr. Setia said. A bill earlier this year stalled in Congress after the Bush administration opposed an amendment that would weaken the power of the new regulator.

“Near term, I do not see any downside if Bush wins and the Senate remains” under Republican control, Mr. Setia said, referring to the amount of extra yield investors demand for agency bonds compared with Treasuries. The subject of receivership, in which the regulator could appoint a third party to sell off assets in event of failure at the companies, may eventually cause yield spreads to widen in the event of a victory for Mr. Bush, he said.

Fannie Mae 10-year notes yield 49.4 basis points more than the 10-year Treasury note, down from a high of 56.2 points on October 1. The spread widened from 49.6 basis points on September 21 after the current regulator, the Office of Federal Housing Enterprise Oversight, last month found Fannie Mae violated accounting rules to manage earnings and deferred expenses to meet an earnings target that triggered maximum bonuses for executives.

Congress created Fannie Mae and Freddie Mac to make funds more widely available for mortgage loans and increase the affordability of homeownership. The companies raise money from investors by selling their own debt, and use proceeds to fund purchases of mortgages from lenders. They also guarantee credit on mortgage-backed securities for sale to investors, including themselves. Fannie Mae and Freddie Mac hold or guarantee almost half of the $7.6 trillion American mortgage market. Their charters exempt them from state and local corporate income taxes and help lower their borrowing costs by authorizing the U.S. Treasury to buy $2.25 billion in securities from both companies in the event of financial straights.

A change in the White House would take some pressure off the companies, and the yield spread to the London interbank offered rate, or Libor, would narrow by 1 to 2 basis points, Mr. Setia said. A Democratic administration would be just as aggressive in pursuing a new regulator though less inclined to take on issues that would affect the implicit federal subsidy to the companies, such as receivership, he said. Standard & Poor’s suggested that receivership powers might be seen as a weakening of government support.