Responding to strong investor demand, Fannie Mae last week expanded a $4 billion offering of noncallable debt to $7 billion, making it one of the largest nongovernment issues ever.

Since the inception of the noncallable debt programs by both Fannie Mae and Freddie Mac, each company has targeted overseas investors looking for a surrogate for Treasuries.

International investors are "willing to look at things that are a little bit riskier in order to get some additional yield," said Henry Willmore, senior economist at Barclay's Capital. The difference between the yield on the agencies' debt and that on Treasuries has widened recently to a "relatively attractive" level, he said.

Data from the first and second quarters suggest that international investors reduced their purchases of Treasuries in favor of government- agency issues and corporate bonds and equities, Mr. Willmore said.

Wall Street reacted favorably to Fannie's expanding the issue.

"A lot of accounts had been asking for larger deal sizes," said Edward I. O'Brian Jr., senior vice president and manager of federal agency trading at Prudential Securities.

In its last issue, in July, Fannie expanded a $3 billion 10-year issue to $5 billion.

Fannie's latest note was priced with a spread of 27.75 basis points over Treasuries, trading at that level the day after pricing-a sign that the deal was "well placed with a wide variety of investors," Mr. O'Brian said.

Fannie Mae said 58% of the issue went to overseas investors-the highest international distribution for any of its benchmark notes-with 32% to Asian investors, 25% to European investors, and 1% to others.

Because of the flat yield curve, foreign investors want three- and five- year paper, said Nadine Bates, manager of long-term funding for Fannie Mae.

"There is just an overwhelming demand for large liquid debt with good credit quality," she said.

As with other noncallable issues, investors include fund managers, banks, insurance companies, and hedge funds. Fannie Mae has issued three-, five-, seven-, and 10-year notes totaling $28.25 billion this year.

Freddie Mac brought it first noncallable debt issue to market in June in a $5 billion 10-year note, followed by a $4 billion five-year note in June. About 20% of each was sold overseas, with 15% to European and 5% to Asian investors, a spokeswoman said.

"As Treasury pays down debt, people have to go elsewhere," said David Ader, director of fixed income for Thomson Global Markets, formerly Technical Data. Fannie Mae and Freddie Mac's "quasi-governmental creditworthiness" permits them to fill the void, he said.

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