Fannie Mae (FNM) on Wednesday announced a two-year, benchmark-size bond issue.

This is the second bond deal this month from the mortgage finance company, and it is offered in a favorable environment.

The voracious investor demand for these issues have driven up the sizes of the handful of previous debt offerings by both Fannie and Freddie Mac (FRE) this year.

Earlier this month, Fannie sold a larger-than-expected $7 billion of five-year benchmark note. The Fed's support of this market through its purchase of debt securities issued by Fannie, Freddie and FHLB, and the perceived tightening of ties between the government and the two mortgage enterprises have boosted investor interest.

Previously, concerns over the extent of government backing of the two mortgage giants, which were taken over by their regulator last fall, had kept investors at bay.

The central bank to date has bought $35.7 billion of these debt securities from investors, 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 line offered to Fannie and Freddie if their networth turns negative - have rallied investor confidence.

In recent deals, domestic portfolio managers have bought nearly two-thirds of an issue, while Asian and European buyers contributed to the rest. This is a shift in paradigm from before the takeover when Asian and foreign investors had an almost equal weighting with domestic investors.

An added lure to 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 to the widening of some of the corporate bonds issued with the FDIC guarantee, has brought fresh buyers to this market.

Fannie expects the new two-year issue to price on Wednesday. The book is run by J.P. Morgan, Barclays Capital and UBS Securities.

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