The dwindling supply of U.S. Treasury debt - along with recent volatility in the bond market - has led certain industry regulators to believe that a new benchmark may be in order.
Many are suggesting the market should make room for Fannie Mae.
While Treasurys "are not nearly as good a benchmark as previously, we lack any perfect alternative," a PaineWebber report stated.
"We believe Treasuries will retain their primary role as a pricing benchmark, but will no longer reign supreme as the exclusive benchmark," PaineWebber said in its report. "Primary and secondary debt will be increasingly spread off both Agencies and the swap curve. There will also be continued and increased use of spread product to hedge other spread product."
In a panel discussion at the Bond Market Association's annual meeting last week in Puerto Rico, questions focused on Fannie Mae as the next benchmark, practically ignoring World Bank debt or corporate debt. It is perceived that the latter debt has been lacking liquidity, and it is liquidity that defines a benchmark, panelists said.
"We expect 2000 to be the year that the swaps and/or benchmark agencies replace the Treasury market as the main benchmark and hedging vehicle for spread product," said Art Frank, head of mortgage research at Nomura Securities.
He continued: "As the Treasury market declines in size and activity, and its issues often become very technical and very special in the repurchase market, it becomes much less useful as both a benchmark and hedge vehicle for spread product."
Fannie Mae debt seems a logical choice because of its high level of liquidity, a tight bid/ask spread, and large, consistent issuance.
Linda Knight, Fannie Mae's treasurer, was unable to comment by press time.