Agencies tighten on Fed plan; volumes thin ahead of payrolls; Fannie Mae to sell two-years

By Kenneth Lim

Boston, Nov. 4 - Agency spreads narrowed slightly on Thursday as the market continued to enjoy a boost from the Federal Reserve's plan to buy $600 billion of Treasuries.

Fannie Mae took advantage of the recent richening in the market, announcing an offering of two-year Benchmark Notes.

Two-year spreads were flat on the day, but three- and five-year spreads came in by 1 basis point. Spreads in the 10-year sector tightened by 2 bps.

"Agencies are actually doing pretty good," one agency trader said. "With swap spreads widening like they are, especially in the longer-end maturities, agencies are unchanged to maybe a little tighter."

Callable spreads underperformed because volatility was a tad higher.

"Callable spreads are out, based on the move in swap spreads and a little bit higher volatility," the trader said. "Callable spreads are probably about 4 to 6 bps wider."

Fannie Mae plans two-years

Fannie Mae said it will price new two-year Benchmark Notes on Friday, with market sources putting price talk at a spread of 10.5 bps over Treasuries.

The size of the deal has not been set, but it is expected to be at least $3 billion.

Barclays Capital Inc., Deutsche Bank Securities Inc. and UBS Securities LLC are the lead managers.

Price talk was a concession of about half a basis point to surrounding issues, another trader said.

Fannie Mae, which already sold $8 billion of new three-year notes and $1 billion of reopened five-years in the previous week, surprised the market by announcing another benchmark-sized offering.

"I was a little surprised that they did come to the market," the trader said. "My understanding is there's a pretty good book, north of $6 billion or so, so I would expect it to go well."

Fannie Mae has outpaced the other government-sponsored enterprises in issuing benchmark-sized bullet deals this year, but that volume is probably reflective of opportunism more than funding needs, the trader said.

"I think that their slots have just come at opportune funding times versus what they were forced to pay over the past few months," the trader said. "If the market were 6 bps back versus Libor versus Libor flat, I would bet they wouldn't have come with a deal."

The last couple of deals were believed to have had strong support from foreign buyers overnight, and if that is the case again, price talk could be tightened ahead of pricing. But otherwise Fannie Mae probably wants to sell as much as it can, the trader said.

"They really want to build the book to move this out, so I'm not sure how much you can tighten this," the trader said. "If they cheapen relative to swaps, by 0.5 to 1 bp, it's still a decent level for them. There are accounts that are not interested due to the low absolute yield levels, and I think they're cognizant of that."

Low volumes

Trading volumes remained weak on Thursday as investors remained wary about putting money to work with Friday's employment situation report still down the road.

"We do have unemployment tomorrow morning, so that's the next big game in town," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson. "I think a lot of people have really squared their positions before the numbers tomorrow."

The long end of the yield curve is the most vulnerable to the coming data, Hurley said.

"It really kind of depends on how the number prints," she said. "But we've seen a lot of volatility on the long end, so that definitely could impact that sector."

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