To better meet the needs of its investors, Fannie Mae has created a short-term debt securities issuance program known as "benchmark bills," which are to be issued weekly through a Dutch auction via a Web-based auction system.

The first auction was held Nov. 9, and was the single source of the company's three- and six-month discount debt securities. A total of $6.5 billion was auctioned; $5 billion in three-month securities due Feb. 10, 2000 and $1.5 billion in six-month securities due May 11, 2000.

The three- month bills priced at 98.633, with a money-market yield of 5.543% and a stop-out discount rate of 5.467%, while the six-month bills sold at 97.246 with a money-market yield of 5.633% and a stop-out discount rate of 5.478%.

All auctions will be conducted in a Dutch, or "single-price," auction style, in which Fannie Mae will rank bids from the lowest yield to the highest yield required to sell the amount offered. All awards will be at the highest discount rate, or stop-out bid, a Fannie Mae spokesman said.

Auctions will be conducted weekly, and Fannie Mae hopes to end the irregularity of secondary market issuance.

"The traditional agency discount-note market has been characterized by irregular issuance, with much of the primary distribution going to dealers," said Linda K. Knight, Fannie Mae senior vice president and treasurer. "Benchmark bills will provide investors with ease of access to larger-size Fannie Mae discount notes issued in a more disciplined and programmatic manner."

Each Tuesday, Fannie Mae will announce the size of each auction. Auction ranges will be between $4 billion and $8 billion for three-month securities and between $1.5 billion and $4 billion in six-month securities.

On Wednesdays, competitive and noncompetitive bids will be accepted beginning at 8:30 a.m. Minimum bids will be $1 million and can be increased in increments of $1,000. Dealers that wish to bid on their own accounts will be limited to 35% of the aggregate amount being auctioned to allow multiple dealers to support each issue in the secondary market.

Then on Thursdays, the bills will settle through the Federal Reserve Bank's book entry system. In the event that a settlement date is a nonbusiness day, they will settle on Friday, as was the case last week because of Veterans Day. All schedule changes will be made one week prior to the auction.

Despite adding regularity to the discount-note market, some dealers see the benchmark bills effort as a negative move.

"From a dealer perspective, it certainly cuts into the discount-note program," said Art Frank, director of MBS research at Nomura Securities. "The selling concession from a dealer perspective declines on the benchmark bills, and while the benchmark doesn't eliminate all discount notes, they eliminate discount notes of three- and six-month maturity and certainly would expect to diminish the discount note program for maturities of two, four and five months."

Frank added that issuance of the three- and six-month securities could be a beginning for Fannie Mae, who may in the future decide to auction with their benchmark three-year, five-year and 10-year programs. "There's really nothing to stop Fannie Mae from doing this," he said.

Furthermore, the move is seen as a way for Fannie Mae to take in some of the demand created by the Treasury's slowdown in issuance due to recent surpluses.

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