Shares of Freddie Mac surged on Wednesday as strong demand for a record preferred stock issue signaled the second-biggest provider of U.S. home funding could access capital even in turbulent markets.

Freddie Mac stock marked the best one-day percentage gain in 19 years after the company on Tuesday said it would soon raise $6 billion in a preferred stock offering. At least $16 billion in orders for the issue allowed underwriters Lehman Brothers Holdings Inc and Goldman Sachs Group Inc to push away buyers asking for yields near 9 percent, and target a rate closer to 8.25 percent, according to two investors.

The preferred sale is also significant since it follows an announcement by Citigroup earlier this week of a $7.5 billion cash infusion in a deal with the Gulf Arab emirate of Abu Dhabi, said Dan Fuss, vice chairman of Loomis Sayles, which manages $100 billion in fixed-income assets.

The equity capital that is being added to the balance sheet of both Freddie and Citicorp, that is very good news, said Fuss, who is considering the preferred issue. It's an indication that there is capital out there.

Freddie Mac shares rose $3.69, or 14.3 percent, to $29.42, the highest level since the company reported a $2 billion third-quarter loss last week. Shares of Fannie Mae, the other housing-related government-sponsored enterprise, rose $2.90, or 9.9 percent, to $32.30.

Rising credit expenses at Freddie Mac and Fannie Mae, the largest U.S. provider of home funding, caused losses at both in the third quarter, unsettling investors who had seen the companies as stalwarts through the mortgage crisis.

Freddie Mac, in addition to announcing the preferred stock sale on Tuesday, halved its dividend to preserve cash. In September and October it sold $29 billion in assets to reduce capital needs in a bid to meet surplus requirements from its federal regulator.

Building a capital cushion will allow Freddie Mac to continue buying and guaranteeing loans from lenders. Lenders have increased reliance on funding from Freddie Mac and Fannie Mae in recent months as investors rattled by subprime mortgage losses pulled support from funding programs orchestrated by Wall Street investment banks.

The higher stock price today is a reflection of confidence in solving their problems, said Andrew Brenner, an analyst at MF Global Inc. in New York. Investors also appear willing to bid over the preferred stock issue price, he said.

Freddie Mac's perpetual preferred stock issue on Tuesday was seen by sources marketed with a dividend yield of 8.25 percent fixed for five years, and floating thereafter. But talk persisted that Freddie Mac would price the issue cheaper to draw more widespread interest.

If the offering is viewed as a relative bargain, a strong level of interest may signal much-needed investor confidence in the sector, Walter O'Haire, an analyst at Boston-based financial research firm Celent, said in an e-mail.

Freddie Mac is likely to finalize the preferred issue late on Thursday or Friday, said one investor.

While it is uncertain whether Fannie Mae needs to raise capital now, Freddie Mac's market access bodes well for its rival should the need arise.

(Additional reporting by Jennifer Ablan, Karen Brettell and Julie Haviv; editing by Leslie Adler)

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