In 2005, net issues of agency and GSE-backed securities were only 7.8% of levels of 2001, when Fannie Mae was in her heyday, aggressively flogging mortgages to the masses.

In 2005, net issues of agencies were only $50.7 billion, indicating that this sector had become far less important in the fixed income market than at any time in the last decade. (See: Federal Reserve national flow of funds account F210.)

However, Fannie Mae and her kin are not dead and are coming back.

In Q4 2005, net issues of agency securities rose to $377.3 billion (annual rate).

This was still only 58.7% of the rate of net issues in 2001, but is a definite proof of life.

Much of the mortgage securitization business that was handled by the agencies went to issuers of asset-backed securities, controlled by commercial banks, after the government put restrictions on Fannie Mae, encouraging CEO Franklin Raines to step down.

As the agencies get their capitalization and accounting in order, competition in this segment of the fixed income market can be expected to heat up.

Net new issues of agency securities turned negative in Q3 2005, as a result of the federal government’s crackdown on operations of Fannie Mae in late 2004.

(See: Flow of Funds Table F210, Agency- and GSE-backed Securities.)

This represents a withdrawal of over US$540 billion in the annual supply of these popular debt securities (the average net new issues from 1998 to 2003). This is part of the answer to Chairman Greenspan’s ‘conundrum’ as to why long-term interest rates did not rise as expected, in response to the Federal Reserve’s manipulation of short-term rates and the subsequent economic recovery.

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