Fannie Mae (FNM) on Thursday sold a record $15 billion in two-year notes amid strong demand, indicating investors are keen to buy debt backed by the U.S. government.

This is the second super-sized debt offering this month from Fannie. Last week, Freddie Mac (FRE) sold its largest-ever debt issue of $10 billion.

The strong demand for agency debt comes as the Federal Reserve continues to support this market through its purchase of debt securities issued by Fannie, Freddie and the Federal Home Loan Bank system and as ties between the government and the mortgage companies tighten.

The $15 billion Fannie deal received orders of more than $20 billion, and investors who were unable to purchase the bond then swooped in to buy them in the open market after the sale, causing risk premiums on the bonds to narrow further.

"There's a desire to put money to work," said Michael Graf, managing director at Barclays Capital in New York.

The deal, sold at 68 basis points over comparable Treasurys, is quoted about 5 basis points tighter at 63/61 basis points, said Jim Vogel, agency debt strategist at FTN Financial. Investors, who were largely based in the U.S., were drawn to the relatively high risk premium, he added.

Fannie's older two-year note that matures in October 2010 carried a risk premium of roughly 28 basis points, while a Freddie security maturing January 2011 carried one of 45 basis points.

Domestic investors bought 76.1% of the total $15 billion, while Asians bought just 11.8%. Fund managers bought 57% of the deal, commercial banks bought 16.8% and central banks accounted for 14.7%.

The note sold Thursday has a yield of 1.801%, down from a yield of 2.896% that Fannie's $7 billion of two-year notes fetched at a sale in September. U.S. investors bought 63% of that deal.

Huge investor demand for these issues has driven up the size of the debt offerings by both Fannie and Freddie this year.

Just this month, Fannie sold a hefty $7 billion of five-year benchmark notes at 93 basis points over comparable Treasury notes to yield 2.767%. The Feb. 3 deal also generated strong investor demand, especially from domestic buyers who purchased 65.6% of the deal. Asian investors took nearly 20% of the share.

Vogel cautioned, however, that the mammoth size of these deals could cause expectations the agency will continue selling notes in large size. If they come with smaller deals, it could be taken to be a sign of weakness even if it's not the case.

The Federal Reserve has bought $35.7 billion of agency debt securities from investors to date and is expected to buy $100 billion worth, or more, if necessary.

In addition, recent announcements from the U.S. Treasury - including the increase to $200 billion each of the credit lines offered to Fannie and Freddie if their net worth turns negative - have rallied investor confidence.

An added incentive for buyers has been the good performance in the secondary market of agency bonds in the past couple of weeks.

The tightening of risk premiums, especially when compared with the widening of some of the corporate bonds issued with the Federal Deposit Insurance Corp. guarantee, has brought fresh buyers to this market.

Joint leads on the Fannie deal were J.P. Morgan, Barclays Capital and UBS Securities.

-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com

(Prabha Natarajan contributed to this report)