By Arthur Frank, director of mortgage research at Nomura Securities

In April 1999, both Fannie Mae and Freddie Mac launched their callable benchmark note programs, motivated by the success of their bullet benchmark note programs in 1998. Prior to this program, the callable agency debenture market consisted of a large number of relatively small issues, many of them under $100 million and therefore not included in the major bond indices. These small issues had relatively poor liquidity compared to mortgage passthroughs. There was not an active two-sided market in inter-dealer broker screens, so that dealers could not readily short these issues to facilitate investor trades. As a consequence of this illiquidity, many large money managers who actively traded their portfolios avoided the callable debenture market.

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