Fannie Mae capitalized last week on investors' flight to quality by bringing $2 billion of additional funds to the noncallable debt market.

Fannie reopened a 10-year $5 billion Benchmark note that it first brought to market in May, boosting its value to $7 billion. The deal was priced at 58.5 basis points over the current 10-year Treasury, said John W. The Losen, vice president of debt marketing at Fannie Mae.

Unlike other noncallable deals brought to market in the past eight months, this one went predominately to U.S. investors, Mr. The Losen said. There was some European interest, he said, but not as much as for the expansion of a five-year issue at the beginning of August that got the largest international distribution of any security in Fannie's Benchmark program.

Fannie has issued $30.25 billion of notes since it began its Benchmark program in January.

On Wall Street the note traded close to the issue price for most of Friday, said Charles Blackburn, a trader for Prudential Securities. "There has been an incredible backup in agency spreads," and this was one of the reasons investors bought the notes, Mr. Blackburn said.

"Since Benchmarks are at historic spread levels, I think that a lot of fund managers and other fixed-income managers saw tremendous relative value in the securities and had been buying the issue fairly heavily in the secondary market before this reopening," said Mr. The Losen. "That demand encouraged us to reopen the security."

Fannie Mae's hopes of creating a yield curve in its own debt may be coming to fruition. The company's notes are viewed as a "flight-to-quality- type vehicle" amid the uncertainty and tumult in emerging markets, Mr. The Losen said.

"With Treasuries at such low yield levels, a lot of investors are finding they can find impeccable credit quality and tremendous liquidity" with the notes, he said.

"The same international forces that are pushing Treasuries up as a haven, as a flight to quality, are also making credit spreads wider," said Arthur Q. Frank, director of fixed-income research for Nomura Securities International.

From here on, Mr. Frank said, players in non-Treasury taxable fixed income will focus more on the swap curve-which represents generic market credit risk-and perhaps less on the Treasury curve. Spread products have "somewhat disconnected from the Treasury market," he said, and the large- scale flight to quality in Treasuries has caused "a repricing of everything else relative to Treasuries."

With spreads widening over the last few weeks, investors in mortgage- backed securities have been finding more value in them.

"Mortgages have widened out an awful lot as the market rallied," said William T. Lloyd, director and head of market strategy and credit research for Barclays Capital, on Friday. But over the last couple of days mortgages started to stabilize as a number of big sellers forced spreads out further, and investors started to buy at an attractive spread of 135 basis points over the 10-year Treasury, he said.

Mr. Lloyd said investors are trying to get their bearings in this market. For investors who think the market has hit the bottom in yields, mortgages look very attractive, he said. But in flights to quality, he noted, investors put less emphasis on yield as they seek safe currency and asset classes.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.