An increase in demand last week allowed Fannie Mae to issue a record-breaking amount of its benchmark notes, totaling $10 billion.
Fannie Mae issued $4 billion of two-year notes and $6 billion of its 10-year notes Jan. 10. This is the first time the company has issued a two-year note.
"People had cash to put to work," explained John The Losen, Fannie Mae's vice president of debt marketing. "Being the beginning of the year, the fact that the spreads on these benchmarks look attractive, and the liquidity that's been demonstrated in the securities over the past two years, since we've started bringing them to market." He added that demand for the bonds, especially the 10-year notes, were oversubscribed.
With the sale of the two-year notes, Fannie Mae now has a far-reaching yield curve, ranging from three months to 30 years. "A number of fixed income investors and other market participants have started to use the Fannie Mae benchmark yield curve as an alternative analytical and pricing curve in addition to the on-the-run Treasury curve," The Losen said.
The sale, like many others last week, was conducted using the Internet (see Web, page 3). The electronic component of the sale was handled on the platforms of Morgan Stanley Dean Witter and Merrill Lynch & Co., the lead managers, though Fannie Mae pioneered the Web-based fixed-income platform.
"When we introduced our benchmark bills program, we were the first to introduce a Web-based distribution system for fixed income offerings," said The Losen, "partly so the largest Web based distribution system for our offerings in conjunction with the introduction of the benchmark bills, because those are priced via Dutch auction."
Fannie Mae will be conducting such auctions on a monthly basis, with a five-year note sale which will be announced Feb. 3, priced Feb. 10 and sold Feb. 14. While Fannie Mae cannot predict whether future sales will amount to this month's $10 billion, they do anticipate future ranges between $4 billion and $6 billion, changing upon investor demand for the product, The Losen said.
"I think especially with this issuance calendar, it certainly enhances the liquidity," he added. "A lot of institutions have started using them for hedging purposes, for duration adjustment purposes, for overall portfolio management. The financing market for the securities has been very robust. So what's interesting is the wide variety of purposes for which the benchmark securities are being used."
