The term "yield curve"-as Wall Street and fixed-income investors know it-may be changing forever. At least that's the dream of Fannie Mae, which this year started to build its own yield curve when it launched a noncallable debt program.

The U.S. government budget surplus created a market opening for the quasi-governmental agency, which is the largest buyer of mortgages on the secondary market, and which dwarfs most private companies. With the Treasury reducing issuance, Fannie saw an opportunity to attract investors interested in a large, liquid substitute for government debt.

Now, with over $40.25 billion in noncallable Benchmark notes issued to date, the program has given the company a "worldwide premium position in global markets," said James A. Johnson, chief executive officer and chairman of Fannie, on Wednesday.

Fannie securities are already being used as a substitute for Treasury securities in risk management and other investment strategies, Mr. Johnson said.

"Benchmark notes for all their simplicity-issuing large, liquid deals- are radical in that no entity other than Treasury had ever tried to, on a regular basis, issue large deals," said Linda Knight, senior vice president and treasurer at Fannie Mae. "We are very serious about building a yield curve."

Fannie uses the proceeds to fund mortgage purchases for its portfolio, meaning the program has contributed mightily to liquidity for U.S. mortgage lenders, when other types of assets cannot be sold at any price.

And current market conditions have given Fannie "tremendous opportunities to grow our book," Ms. Knight said, with the difference between spreads on the assets Fannie buys and the debt Fannie issues as "positive as we have seen in the 1990s."

Fannie Mae kicked off its program in January by providing guidelines on how it intended to issue notes: Each month it would come to market with a new issue, reopen an existing issue, or pass.

To date the company has brought eight new issues to market and has reopened six other notes, including notes with three-, five-, seven-, and 10-year durations. The high number of reopenings was a result of investor interest in larger deals, Ms. Knight said.

"We need to have a whole range of securities, a whole yield curve of agencies," said Larry Hill, executive vice president for Investment Advisers Inc., a subsidiary of LLoyds TSB Group PLC in Minneapolis.

Larger issues mean better trading for investors. Investors similar to Mr. Hill, who has up to 10%, or about $250 million, of his portfolio in agencies, feel "more comfortable holding core positions in agencies instead of just holding them all in Treasuries," because the program enables investors to get "high-quality yield" at the same point on the yield curve, he said.

The type of notes Fannie issues is determined by mortgage portfolio funding needs and demand from investors. The program is most successful "if we can meet the needs of the investor base and the needs of the mortgage portfolio at the same time," Ms. Knight said.

Wall Street has played an active role in selling Fannie's notes to investors and in providing the Washington-based enterprise with details on primary and secondary market trading.

"On the one hand, we have given them something of value: a large, liquid deal that sells well," Ms. Knight said. "But they have added their commitment to trading the security, to actively trade it with very tight bid offers."

The dealer community also quickly established a repo market, borrowing and repurchasing Fannie Mae securities just as they would with Treasuries, Ms. Knight said.

Fixed-income executives on Wall Street say that the key to Fannie maintaining the momentum of the program is consistency through regular issues.

"Wall Street is anxious to do business with Fannie Mae, but Fannie Mae always listens and tries to respond to dealer input," said Edward I. O'Brien Jr., senior vice president and manager of government agency trading for Prudential Securities Inc.

Investors and Wall Street dealers say that the most active issues have been the five- and 10-year notes. But to round out the yield curve, Fannie will need to issue the two-year and 30-year notes, investors said.

The minimum investment is $10,000, but some Wall Street dealers have seen purchases as high as $100 million.

Margaret Danuser, a portfolio manager for Founders Asset Management LLC, a mutual fund company owned by Mellon Bank, said that she has actively traded Benchmark notes in the five- and ten-year sector, and that she regards the notes as a type of "Treasury surrogate, which are very liquid."

Benchmark notes are "an easier animal to deal with," she said, because the issues are large and liquid and have higher credit quality than other spread products. The spread that is offered on these securities over the Treasury also gives a "yield boost," she said.

But when problems racked the credit markets during the past four months, noncallable issues were not immune. And investors were so risk-averse that they were only buying Treasuries, Ms. Danuser said.

The notes "widened out significantly along with any other spread-type product despite its credit quality and liquidity," she said.

In August, at the height of the credit crisis, Fannie's 10-year note was as wide as 80 basis points over the 10-year Treasury, she said. Earlier in the summer its spread was 33 basis points over the 10-year Treasury, and at Wednesday's close it was 54 points over the 10-year.

As with any promising program, Fannie has competition.

Fannie Mae's secondary-market rival Freddie Mac also has a noncallable debt program. Freddie has issued $16 billion of notes in its Reference note program - $8 billion with five-year maturities, $8 billion with 10-year.

Freddie Mac said that it may reopen new and previously issued notes by at least $1 billion up to an individual bond limit of $10 billion. Freddie also said it hopes to issue $40 billion of notes over the next 12 months in bonds with terms between two and 10 years, depending on market conditions.

And sources on Wall Street say that the Federal Home Loan Bank System is putting together a program to focus on noncallable notes that are five years and shorter in duration.

One fixed-income executive on Wall Street said that these noncallable debt programs have also gained momentum because the callable debt market has become "a shadow of its former self" in the aftermath of economic turmoil in Asia.

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