Growth in the market for agency mortgage-backed securities will likely decrease 9.6%, to $389 billion, next year, analysts at Citigroup Inc. said — a smaller drop than other analysts have projected.

The fall in net issuance would accompany an 18.6% drop in gross sales, to $1.35 trillion, Citi analysts Brett Rose and Brad Henis wrote in a report last week.

The $5.4 trillion market includes securities guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association.

U.S. banks will play a bigger role as buyers of the debt, after the Federal Reserve and Treasury Department under programs aimed at bolstering the housing market this year purchased about three times net issuance and 75% of gross issuance, the analysts said.

Investors outside the U.S. also may be net buyers and "demand from money managers and hedge funds will change even more dramatically — from strong negatives to near neutral," the analysts wrote.

Growth in supply may drop a "low" amount as defaulted or modified mortgages are purchased out of the securities, with many being "resecuritized," and as refinancing falls, they said.

JPMorgan Chase & Co. analysts last month predicted about $300 billion of 2010 growth in fixed-rate agency mortgage bonds, the largest type, compared with Citigroup's projection for $434 billion amid adjustable-rate debt declines.

Credit Suisse Group analysts last week predicted $220 billion of net supply.

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