Agency bullet spreads unchanged as callables steal show; Fannie Mae sells $1 billion notes

By Kenneth Lim

Boston, Sept. 15 - Agency spreads were mostly unchanged Tuesday, although issuance was furious in the step-up callables space as investors sought to take advantage of tight spreads.

Fannie Mae sold $1 billion of five-year 3% Benchmark Notes in a reopening at a slight concession, but the deal was not seen as a market mover.

Bullet spreads were unchanged on relatively light volumes with most of the attention focused on callables, an agency trader said.

"Agency spreads are pretty much unchanged," the trader said. "Swap spreads are in about 1 to 2 basis points, so agencies are outperforming swaps. It's really been a quiet day for bullets."

Callable issuance, however, had "one of the biggest days in a while" with most of the deals consisting of step-ups, the agency added.

"With the curve being steep and spreads being as tight as they are, we're seeing a lot of interest in step-ups, so structured products are kind of driving the market," the trader said. "There were a few deals that have been upsized to Global-type size. We have a $3 billion three-year/one-year non-callable at 2%, and a two-year/one-year non-callable $2 billion deal."

The larger issues were mostly at the short end of the yield curve, the trader said.

"Today's pretty good, at least in callable agency land," the trader said.

Fannie Mae reopens five-years

Fannie Mae priced $1 billion of an existing series of 3% five-year Benchmark Notes at 101.221 to yield 2.737% on Tuesday, according to a press release.

The notes were sold in an auction.

Including the new notes, there is now $4 billion principal amount outstanding under the series.

Fannie Mae is a Washington, D.C.-based government-sponsored enterprise that invests in U.S. mortgages.

The notes ended the day about 0.5 bps wider, although the deal was seen to price with a concession of about 1 bps.

"I think the issue was kind of taken in stride," said agency trader Doug Matthius of Southwest Securities. "Bullets as a whole have been relatively stable for the last several days, trading within a 2 to 3 bps range."

Fragile period

Matthius noted a tug of war between the improving stock market and a persistent sense of caution in the broader markets that is affecting agencies.

"As much as the stock market has been behaving itself lately, there're still too many landmines," he said. "We're in a period of tranquility right now; we're not yet in a period of robust growth, so we're still in a very fragile area...Right now everybody's going to be staying in safe haven instruments like Treasuries and agencies. From a retail point of view, you're not getting bang for your buck, but you're going to get your money back at the end of the investment."

The agency trader said post-Labor Day markets have not picked up as had been hoped.

"We continue to have days like yesterday where nothing's going on," the trader said.

Some investors may have been pushed onto the sidelines by recent rallies in agencies, the trader said. But those investors will occasionally be drawn in by short-term bargains.

"I'll tell you right now on days when the market does back up like today, we do get a little interest on days like that," the trader said. "I think there's some skepticism with the curve, especially on the long end. Maybe there's some interest out there in a possible trade war going between China and the U.S. over tires, and some people are buying Treasury debt, just little variables here and there putting kinks in the curve.

"You're going to see good buying on dips, and that's probably going to rule the markets for some time."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.