Shares in Fannie Mae and Freddie Mac, America's biggest mortgage groups, slumped to their lowest levels for two decades as traders speculated that Washington will be forced to bail out both of them.

The US Treasury yesterday backed away from assurances that it would not have to rescue Fannie Mae and Freddie Mac as shares in the mortgage financiers fell sharply for a third day.

In New York, Fannie Mae shares were down 27% at $4.40 while Freddie Mac shares were 22% lower at $3.25, reflecting growing concerns among investors that a government intervention could wipe out shareholders and affect the price of the company’s more junior debt.

The Treasury was granted powers last month to extend its credit lines to Fannie and Freddie and invest in their equity. But when asked about its plans, it had been adamant it did not expect to have to make use of the new authority.

That changed yesterday when the Treasury declined to repeat its customary assurance.

Instead, a spokeswoman said it was 'vigilantly' monitoring market developments and was “focused on efforts that will encourage market stability, mortgage availability and protecting the taxpayer”.

The shift in emphasis towards a more open-ended statement does not necessarily mean the Treasury is close to intervening to rescue Fannie and Freddie, since government funds would still only be used as a last resort.

Financial Times, The Times, Daily Telegraph, The Independent