Agency spreads narrow as investors eye alternative to Treasuries; Fannie Mae reopens notes

By Kenneth Lim

Boston, April 29 - Agency spreads tightened across the board on Thursday as recent richening in the Treasury market pushed investors toward better-yielding instruments.

Fannie Mae also saw strong demand on its $1 billion reopening of a two-year Benchmark Notes.

Bullet spreads narrowed by about 1 to 2 basis points across the yield curve on Thursday as buyers bid up the market.

"Very strong buying today," one agency trader said. "Agencies just seem to be bulletproof. They just simply go tighter every day...You can tell by the price action on the screens that they just go tighter, mostly the on-the-runs."

Volumes remained thinner than usual, however.

"We're not seeing the action," the trader said.

Michael J. Gladden, vice president of institutional sales at Mischler Financial Group, said investors continue to seek agencies despite the high valuations because Treasuries are offering extremely low yields.

"They want to extend out the risk curve from Treasuries to agencies but don't want to extend into the corporate market," Gladden said. "So they're not buying Treasuries and they're picking up at least something."

The Treasury's strong support for agency debt into 2013 has also raised the market's willingness to buy short-term paper.

There's an "implied guarantee for agency bonds," Gladden said. "It's guaranteed for the next year or so, so in essence agency bonds are trading like they're Treasuries."

Callables enjoy demand

Callable demand was strong on Thursday, and although spreads did not move much, the sector as a whole richened, Gladden said.

"We haven't had a lot of movement in spreads because the Treasury market is taking care of that," he said. "With the volatility, we've shifted between 6 and 9 basis points within a day for the past few days. So the underlying movement in Treasuries has been taking care of it."

Callable spreads are currently at historically tight levels, he added.

"That's brutally tight," Gladden said.

Fannie Mae reopens two-years

Fannie Mae's 1.25% Benchmark Notes due June 2012 tightened by about half a basis point on Thursday after the issuer sold an additional $1 billion through a reopening.

The notes ended at a spread of about 23 bps bid, 22.5 bps offered. The reopened notes priced at an initial spread of about 21.5 bps.

"They generally come through the market, but there was good demand for that deal," a trader said.

Fannie Mae priced the notes at 100.011 to yield 1.245%. There is now $5 billion outstanding in the series.

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