The prospect of conversion to the euro-the common currency of the European Union scheduled for release in 1999-helped boost the demand for Fannie Mae's second Benchmark note issue last week.

Europe is "going to change much more from a currency-oriented market to a credit-oriented market," said William T. Lloyd, director and head of market strategy and credit research for Barclays Capital. "Right now, buying U.S. governments or quasi-U.S. governments is a relatively safe way for Europeans to play the market."

"Many European investors are diversifying their investment holdings down the credit ratings scale as well as diversifying away from European borrowers," said Kimberly A. Slawek, senior director at Fitch IBCA in London.

The Benchmark notes, issued in January and February, are viewed by investors as a proxy for government debt, and "European clients have been very interested" in them, Mr. Lloyd said.

For the 10-year Feb. 5 issue Fannie Mae reported that European investors purchased 31% of the securities, Japanese 6%, Asians outside Japan 2%, and U.S. investors 57%.

In January when Fannie issued a $4 billion five-year note, 25% of buyers were European, 12% Asian, and 58% U.S. investors.

European investors are attracted to the agency debt securities because the high credit quality creates a government surrogate and because of the liquidity, Mr. Lloyd said.

"People want to own dollars right now," he said. "Here's another high quality dollar-denominated product where you get a little extra spread." The 10-year note issued by Fannie Mae has a 24 basis point spread, he said.

Though European and Asian investors enthusiastically bought Fannie Mae's notes, other mortgage-backed securities may be losing ground on some investors' buy lists.

"People in general are concerned about the high levels of prepayments. There really isn't a safe place to be in the mortgage-backed market right now in terms of what's going to happen with prepayments and supply," Mr. Lloyd said.

Overseas investors have not been very active in the mortgage-backed securities arena during the last few months, said Alec Crawford, mortgage strategist at Morgan Stanley.

In 1997 Japanese investors were big players in the Ginnie Mae market, purchasing these securities for accounting benefits and because they were zero-percent risk-weighted, he said.

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