UPDATE 1-Fannie Mae sells first 3-year note since April

(Recasts, adds underwriter quotes, distribution, updates spread)

NEW YORK, July 9 (Reuters) - Fannie Mae (FNM.N) (FNM.P) sold its first three-year benchmark notes since April on Thursday, drawing robust domestic investment and paying a risk premium to Treasuries sharply lower than the prior offering.

The $4 billion 1.750 percent issue was priced at 99.926 to yield 1.775 percent, or 32 basis points over comparable U.S. Treasuries.

Thursday afternoon, the yield spread had been reduced to 31.5 basis points, said Michael Graf, managing director and head of agency trading at joint lead manager Barclays Capital.

A combination of lower net issuance and aggressive purchases of agency securities by the Federal Reserve have slashed yield spreads throughout this year.

In April's sale of the same amount of the same maturity, the notes yielded 1.918 percent or 74 basis points over Treasuries.

The prior three-year sale, for $6 billion in January, yielded 2.006 percent for a 83 basis-point spread.

In June, Fannie Mae opted to skip both of its issuance windows for the first time this year, so Thursday's sale was the first since a $5 billion five-year deal in May.

Fannie Mae said 70.4 percent of the new notes were sold to investors based in the United States, 17 percent in Asia and 4 percent in Europe and the 8.6 percent to other regions.

Fund managers bought 41.2 percent of the issue, central banks took 26.4 percent and commercial banks 23.4 percent of the notes.

"There has been tremendous domestic demand all year long," Graf said. "Investors have increased allocation to the product because there has been price stability and cash at hand to be invested."

Banc of America Securities and JPMorgan were the other joint lead managers.

Settlement is July 10. (Reporting by Caryn Trokie; Editing by Chizu Nomiyama)