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"The reduction seen in US government debt in the late 1990s has led to a redution in the supply of intermediate and long-term government bonds, and some concern has arisen over this fact. In the United States, some efforts have been made to promote the long-term debt of Fannie Mae and Freddie Mac as substitute benchmark bonds."

This comes from a passage connected to US treasury bond futures.

I cannot understand why Freddie Mac and Fannie Mae have been chosen as closest to government debt? Didnt one of them go bust in the recession making them not quite default free (as one usually assumes in US debt)?

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Since Freddie Mac and Fannie Mae are government sponsored enterprises (GSEs), the government guarantee was considered "implicit" before the financial crisis. As such, the credit quality of their papers was believed to be almost as high as US Treasuries. This assumption pretty much turned out to be true. Both Fannie and Freddie were taken into conservatorship during the financial crisis, and now their debts are explicitly guaranteed by the US government.

The reason why people were so excited about agencies back in the early 2000s was because of the Treasury buyback, which was reducing Treasury supplies. In fact, the US Treasury didn't issue any 30-year bonds between 2002 and 2006. By early 2006, the longest Treasury bond had only 24 years to maturity. By contrast, there was a steady supply of agency debt, providing more pricing information at the long end of the yield curve. So agencies got a lot of attention as a potential benchmark. Dealers began to build agency curves. CBOT even had futures contracts on agencies.

Of course, agency papers never really reached the benchmark status. The US government soon began to run deficits again and Treasury issuance grew substantially in the ensuing years. Today, agency debt is a shell of its former self....

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