Fannie Mae (FNM) sold a larger-than-expected $7 billion of its five-year benchmark notes Tuesday morning.

This is the first of Fannie's two debt issuances for the month.

The 2.75% coupon note sold at 93 basis points over comparable Treasury notes, at a yield of 2.767%.

The deal generated strong investor demand, especially from domestic buyers who purchased 65.6% of the deal. Asian investors took nearly 20% of the share, and European buyers 10%.

These buyers demanded a higher risk premium than the existing quote for Freddie Mac's (FRE) five-year note that was trading around 79.5 basis points Tuesday morning.

This is Fannie's second deal for the year. In January, Fannie raised $6 billion through a three-year note, and demand from U.S. investors prompted the mortgage company to increase the size of the initial offering.

These sales also are an indication of the changing profile of buyers of these debt securities. While central banks continued to buy, their purchases now make up about a third of a deal while fund managers' stake has climbed up to a sizable 53%.

Market participants say investors who bought the securities would want to see their risk premiums narrow soon.

"The global appetite for term GSE debt will remain sensitive to the ability of the new, larger deals to trade consistently tighter," said Jim Vogel, agency strategist with FTN Financial, in a note to investors.

"The first FNM or FRE deal that fails to pull tight enough could push sizes back to the $3 billion mark," he said.

The notes that were sold in January saw their premiums compress within seven to 10 trading days.

-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071; prabha.natarajan@dowjones.com

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