Agencies' Implicit U.S. Guarantee Lures Foreign Investors

International investors are developing a taste for the products of Fannie Mae and Freddie Mac.

With turmoil in overseas markets, the implied government guarantee of securities from Fannie and Freddie may offer foreign investors an oasis of calm. And Fannie and Freddie are wooing investors.

The government-sponsored enterprises are "moving to global funding as much as they can," said Thomas O'Donnell, a senior analyst at Salomon Smith Barney. "That's very wise because non-Americans have invested very heavily in Treasury debt."

"It's a good proxy for Treasury debt," he said, "with even more benefits. Non-Americans are not as aware of the agency market as they should be and as they will be over time. It's a way for them to get implied government backing on the debt. And it's higher-yielding than Treasury debt."

This week Fannie Mae announced its second $4 billion noncallable note offering. The security will be issued Thursday for a 10-year term. In December Fannie announced its Benchmark program to meet market demand for more liquidity and credit quality. Fannie Mae's Benchmark note issues will vary in size from $2 billion to $5 billion, and it hopes to issue five- year and 10-year notes every quarter. The notes will account for half of Fannie's estimated $80 billion of long-term debt issuance this year.

"Because of the flight to quality and shortage of Treasuries, it is an excellent time for Fannie to bring these to market," Mr. O'Donnell said.

Preliminary figures show that U.S. investors committed themselves to buy 60% of Fannie's note issue scheduled for Thursday. European investors snapped up 32%, and Asians, 8%, said Linda K. Knight, senior vice president and treasurer at Fannie Mae. The share of foreign investment increased since the first $4 billion note issue, a five-year security issued in January, when 23% of buyers were European and 13% were Asian.

Wall Street has registered demand far outweighing the supply of Fannie's Benchmark notes. "We were bowled over by the customers," said Robert J. Lunder, senior managing director in the government bond department at Bear, Stearns & Co. "There's been nothing to date that has been as much in demand as this. It's the first time that we've had people overrunning our position looking for bonds."

Freddie Mac has also been trying to attract additional foreign investors. International markets will be "100% of my focus going forward," said Raymond A. Redlingshafer Jr., whom the agency recently promoted to director of international investors.

"Ironically, many of them are coming to us because they see this non- credit-sensitive asset that gets you a higher yield than Treasuries and they want to know more," Mr. Redlingshafer said.

Freddie Mac has not come out with a product to rival Fannie's program, said Mr. Redlingshafer. But Freddie has some plans for the arrival of a common currency next year in Europe.

"There will be all kinds of new things coming out, particularly because their world is changing on Jan. 1, 1999," when the euro is scheduled to become the currency of the European Union, said Mr. Redlingshafer. "That will make it easier to own mortgages in a couple of ways, and that's where we're working on a couple of products."

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