Agency spreads tighten slightly; Fannie Mae's reopened five-year notes nudge outwards

By Kenneth Lim

Boston, Dec. 16 - Agency spreads tightened slightly on Wednesday as the Federal Reserve maintained its low-interest-rates stance, while Fannie Mae sold $1 billion of five-year Benchmark Notes in a reopening.

Bullet spreads ended a little narrower as investors took advantage of the previous day's widening, an agency trader said.

"We were in a little today," the trader said. "There wasn't much going on except for Fannie Mae, but we did move out slightly yesterday, so it looks like some people may have been buying on weakness."

But trading volumes in general were relatively light, the trader said.

"It's kind of themeless, if you will," the trader said. "The market's moving a little here and there, but there's no one big theme that's really driving trades. Everyone's starting to think about the holidays, going on vacation."

Wall Street Access trader Michael Skinner said corporate notes issued under the temporary liquidity guarantee program also saw better buying.

"I have seen some buying in TLGPs," he said. "I think they were starting to look kind of cheap to GSE names, starting to show a little value there. Especially those due 2012 have been in demand the last couple of days."

TLGP paper due July 2012 to November 2012 is about 10 to 15 basis points cheaper than comparable agencies, Skinner said. Because TLGP issuance has practically ended, the space has slowly begun to see the effects of frozen supply, he added.

"It took almost two months for the Street to get rid of the inventory," he said.

Callable issuance also saw reasonable volume on Wednesday.

"For the most part, callables have been OK," Skinner said. "Step-ups have still been the flavor. People are looking for some protection from higher rates a few years down the road."

The market on Thursday could see the Federal Reserve Bank of New York announce a purchase operation for Friday.

"There's going to be a Fed purchase this week," Skinner said. "My expectation will be at the longer end of curve, seven or 10 years."

Fannie Mae widens slightly

Fannie Mae's reopened 2.625% Benchmark Notes due November 2014 eased about a half-point on Wednesday after the agency reopened $1 billion of the series.

The reopened notes sold at 100.454 through an auction to yield 2.526%. The initial spread was about 21.5 bps, Skinner said.

"They came at about 21.5 bps over, now they're about 22 offered...so they ended right in the screws," he said. "That was certainly the highlight of what would otherwise have been a lackluster session."

The market had been expecting a reopened five-year offering, a new three-year deal or that Fannie Mae would pass on issuing anything. Skinner said the deal came within expectations.

"I think that's exactly what we were expecting," he said. "We also thought if they needed to raise $3 billion or $4 billion they could issue three-years, but obviously their funding needs are such that they only needed to raise $1 billion."

The deal was most likely the final major offering of a benchmark agency note for the year, Skinner added. Next year, an offering in the 10-year sector by any agency would be welcome.

"What we need at some point is liquidity in 10-years," he said.

FOMC holds ship steady

The Federal Open Market Committee on Wednesday concluded its final meeting of the year by leaving policy at current status quo.

"The FOMC meeting came and went," Skinner said. "They said rates will be kind of low for an extended period, so not much change from that statement."

The market may have kept a little on the sidelines ahead of the Fed statement, even though most investors were not expecting major changes.

"I'm sure the Fed meeting today probably attributed to the slightly slower than normal day that we had," Skinner said.

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