Fannie Mae plans to replace most Benchmarks maturing in 2010; fund managers dominate in 2009

By Kenneth Lim

Boston, Jan. 13 - Fannie Mae plans to replace most of its non-callable Benchmark debt that matures in 2010 amid a requirement to pare its mortgage assets, the mortgage agency said in a review of its 2009 funding activities.

Fannie Mae has $61.6 billion of Benchmark Notes maturing in 2010, $66.3 billion maturing in 2011 and $44.6 billion of medium-term notes due in 2010, according to the agency's 2009 FundingNotes report. The agency said it will "most likely replace much of the debt that rolls off."

That "should contribute to Fannie Mae's need to issue debt and remain active in the term debt markets on a fairly consistent basis," the agency said.

But Fannie Mae also faces pressure to reduce its holdings of mortgage assets by about a third to $810 billion by the end of 2010, the agency said. The reduction is required by the U.S. Treasury, which wants Fannie Mae to cut its portfolio every year to 90% of the maximum allowable portfolio amount of the previous year until the portfolio's size reaches $250 billion.

"Our amount of debt outstanding remains at 120% of the maximum allowable amount of the portfolio in the previous year," Fannie Mae reported.

More domestic ownership

Other trends highlighted by Fannie Mae include a higher domestic ownership of its Benchmark debt over the course of 2009.

U.S. investors bought 73.4% of Fannie Mae's Benchmark Notes in 2009, compared to just 48.2% in 2008. The shift came as foreign investors, especially Asian central banks, cut their exposure to agencies while the U.S. Federal Reserve bought up agency paper as part of a quantitative easing program. Asian investors bought 30.5% of Benchmark Notes in 2008, but only 15% in 2009.

In terms of investor type, fund managers became the largest group among Benchmark Notes buyers in 2009, soaking up 56.2% of the offerings. Central banks, which formed the biggest slice in 2008 with 41.1%, shrank their relative presence to just 19.1% in 2009.

Fannie Mae also noted a sharp increase in issuance of callable step-ups in 2009. That structure accounted for 18.07% of the agency's callable issuance in 2009, up from 6.3% in 2008. The most popular structure was 15-year, non-call six months; followed by five-year, non-call six months; and 10-year, non-call six months.

Three-quarters of the step-ups had a Bermudan call, while callable MTN issuance in maturities beyond 15 years rose by about 30%.

"As the market experienced a low interest rate environment throughout 2009, many investors believe rates will be more likely to increase in 2010 and beyond," Fannie Mae reported. "As a result, investors sought backend protection with the potential for an increase in coupon available in callable step-ups."

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