(Recasts, adds Freddie note sale, foreign demand, quotes, changes headline)
NEW YORK, Sept 3 Fannie Mae FNM.N and Freddie Mac FRE.N drew solid demand for $5 billion of new securities on Wednesday even as large overseas investors cut their exposure to the two troubled housing finance companies.
The latest sales underscored their continued access to debt funding that is key to running their businesses and supporting the U.S. housing market.
Freddie Mac sold $3 billion of two-year notes to yield 0.975 percentage point more than Treasuries, up from 0.88 point at its July sale of the same maturity.
Investors were heartened that Asian demand rose slightly from the prior offering given that overseas investment has fallen off in recent months after the pair reported more than $13 billion in losses.
Traders said the Freddie note issue attracted more orders than the amount offered, and the yield premium shaved to about 96 basis points soon after the pricing.
"This seems to be the pattern. They announce a deal, it widens out that sector, the deal goes well and the entire market snaps in as soon it gets the news on how it went," said Brandon Wann, senior vice president of government and agency trading at Vining Sparks in Memphis, Tennessee.
When Freddie Mac announced the note sale on Tuesday the initial spread talk was 95.5 basis points, but the spread at the pricing increased as agencies generally underperformed Treasuries on Wednesday.
"Until we get some more news out of the Treasury on how they're going to treat Fannie and Freddie, if we get any, I think that the supply will trade on a similar pattern where it widens out just before pricing and then if the deal goes okay the deal should trade well," Wann added.
The government has said it may have to intervene and provide funding for the two companies should their financial conditions worsen.
Freddie Mac said it sold 53 percent of the new two-year notes to investors in North America, 34 percent to accounts in Asia, 11 percent in buyers in Europe and 2 percent in other regions.
In Freddie Mac's July $3 billion two-year offering, 35.9 percent was placed in North America, 32.6 percent in Asia, 28.2 percent in Europe and 3.4 percent to others.
Central banks and investment managers were the biggest buyers for the new issue, each accounting for 39 percent of the securities, based on preliminary figures.
The degree of foreign investment has been scrutinized as Fed data have shown central banks shedding agency-related assets all through the latter half of the summer.
Bank of China (601988.SS), for example, late last month said it had reduced its holdings of securities tied to Freddie Mac and Fannie Mae to $12.67 billion from $17.3 billion.
Shares of Freddie Mac were up about 1 percent while shares of Fannie Mae were down about 1 percent at midday.
To read more on Fannie Mae's bill auctions on Wednesday click on [ID:nN03430111] and to see Freddie Mac's note sale results click on [ID:nWNAB9256]. (Reporting by Lynn Adler; Editing by Tom Hals)