Fannie Mae sees increased interest in floating-to-fixed callable bonds

By Lisa Kerner

Charlotte, N.C., May 22 - Fannie Mae said in its latest FundingNotes publication that the floating-to-fixed structure for callable bonds has become more interesting to investors in recent weeks, due largely to the current low interest rate environment.

The coupon on this type of security pays a floating rate for a certain time period, based on a margin to an index, and then adjusts to a fixed-rate coupon after the call date, Fannie Mae said.

Investors like these securities because they offer the potential for increased income while reducing exposure to interest rate risk, according to Fannie Mae.

According to Fannie Mae, the securities are also a way for investors to express their view on the direction of interest rates and provide "a natural hedge against interest rate increases."

The FundingNotes article said investors "can potentially earn an excess return over a comparable Treasury security or a Fannie Mae bullet security."

Fannie Mae said it meets investor demand by issuing callable debt securities through a flexible reverse inquiry process.

Other recent issuance trends noted by the agency include callable step-up notes and zero-coupon callable bonds.

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