Agency/supranational - Winner: Fannie Mae

Bookrunners: Barclays Capital, Citi, JPMorgan

Following hot on the heels of the government bailout on September 7, the $7 billion issue from Fannie Mae received a resounding welcome from the market. The enthusiasm for the US housing agency's book meant the deal was well oversubscribed, at $9.4 billion, driving the price to 70bp over US Treasuries, a level equal to 26bp below mid-swaps.

"A lot depended on this deal working confidence in the GSE sector and more generally across all financial markets," says Sean Taor, head of sovereign, frequent issuer and covered bond syndicate, and covered bond and European agency trading at Barclays Capital. "Execution of a $7 billion deal which performed not just on day one but since then has been seen across the financial sector as a hugely positive sign. It's the only good news the market's seen in the past few weeks."

Waiting for the right moment

Due to their regular visits to the primary market, GSEs have long had a timetable of issuance and both were due to launch a deal in early September. However, while Freddie Mac decided to launch a two-year trade (priced at 6bp below mid-swaps) just before the implementation of the Treasury plan for the GSEs, Fannie Mae decided to wait a day after the announcement to announce the bond issue.

Explaining the decision to delay, Peter Urbanc, director in the DCM team at Barclays Capital in New York, says Fannie spoke to the leads before the launch, making sure that the market was familiar with the Treasury plan. "As you can imagine, there was very little trading of any agency securities immediately following the announcement of the plan so price points were not properly validated until early Monday."

As is traditional, the deal was widely supported by non-US accounts, but the deal is also notable for the participation of US investors - something that owes more to a change in US sentiment than a cooling of overseas interest. Urbanc says that while offshore accounts have bought into agency debt in recent years, US investors have been running underweight positions, beguiled by the superficial charms of structured credit and other assets promising hefty yields.

Renewed interest

Interpreting the higher than usual interest from US investors as a reflection of their current defensive view on the broader credit market and a function of the shutdown of structured credit and now the Treasury action, Michael Graf, agency trading head at Barclays Capital in New York, says this deal indicates US investors are looking again at the GSEs: "The government has got a lot closer to the product, but with net nominal spreads at very wide levels. Two-year swaps were somewhere near 100 when we did the deal. We had a tremendous amount of front-end funds make massive investments."

However, Taor stresses this definitely does not mean that offshore accounts have become wary of the housing agency market, despite the bailout. "More than $2 billion went overseas, which the statistics don't necessarily reflect."

Another interesting facet of the deal was the absence of secondary trading. Graf says: "What's truly amazing is that typically 15% to 18% of a deal size for recent new issues would trade in the market shortly after the issue. If you use that as your metric, you'd have had $1 billion trading in the screen on the first day of this deal. But we saw zero turnover even at the tighter spreads; people didn't buy this trade to flip their positions."

Credit says... It was crucial for confidence in the agency sector that this deal was executed successfully. It was, garnering support from all the important investor groups for a GSE deal and an especially strong showing from domestic US accounts, providing an endorsement of the Treasury's plan for the agencies.

Issuer: Fannie Mae

Date of issue: Sep 9, 2008

Size of deal: $7 billion

Pricing: 70bp over Treasuries.