Agency spreads flat as weakness in swaps erases early gains; new Fannie Mae notes narrow

By Kenneth Lim

Boston, Jan. 14 - Agency spreads ended flat to slightly wider on Thursday despite a positive start on late weakness in swaps.

Fannie Mae sold $4.5 billion of new three-year Benchmark Notes, which tightened right off the bat on their secondary market debut.

The Federal Reserve Bank of New York also announced a purchase operation that will target the one- to two-year sectors for Friday.

Bullet spreads were slightly tighter early in the day as Fannie Mae's offering came at the rich end of talk, boosting confidence about demand in the market, an agency trader said.

"The market did pretty well," the trader said.

But spreads moved back out later in the day.

"At the end of the day here we've kind of seen some selling pressure," the trader said. "I'm not sure what's happening, but swaps are widening a little bit. I imagine some bonds came in relative to this new deal."

Callable issuance was healthy but unspectacular, with the market still digesting the large amount of supply that came around the turn of the year.

"There weren't any huge deals done, which was not a surprise given that the market has rallied and coupons are not that attractive," the trader said. "The Street is pretty long and guys are working through inventory that they built up the last few weeks."

Fannie Mae sells well

Fannie Mae's new 1.75% Benchmark Notes due February 2013 tightened by about 1 basis point on Thursday after pricing at a spread of 29.5 bps over Treasuries.

Price talk on the $4.5 billion deal was at a spread of 31 bps, but that was narrowed to 29.5 bps to 30 bps late Wednesday.

The notes were sold at 99.856 to yield 1.798%.

Banc of America Securities, Goldman Sachs & Co. and J.P. Morgan & Co. were the lead managers.

"The new Fannie deal seems to have gone very well," the trader said. "It was at the larger end of what the price talk was in terms of size. Price talk was tightened, so that was a bit of a positive, and the bonds tightened."

Another trader said the deal appeared reasonably priced and benefited from investors who were seeking safe assets that offer better yields than Treasuries.

"It narrowed about 1 bp right from the start," the trader said. "[There was a] very good response from the market. Anything three years and in is going to attract the safety investors, those who want extremely safe, Aaa assets that offer better yields. Plus it was kind of a quiet day for corporates; so, I think this definitely benefited."

Fed targets short end

The Fed said that it will buy agency notes due January 2011 to January 2012 on Friday as part of its weekly purchase program.

The announcement did not come as a surprise for the market, one trader said. Given that the size of the purchases has been decreasing and short-end spreads are already extremely tight, the operation's impact on Friday spreads is likely to be limited.

"It may have had more effect on the spread market if it was longer out on the curve," the trader said.

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