Agency spreads narrow in bumpy session; Fannie Mae's $5 billion deal sees strong response

By Kenneth Lim

Boston, June 3 - Agency spreads tightened moderately on Thursday after getting bounced around with swaps in an up-and-down session.

Fannie Mae saw a strong response for its new $5 billion of two-year Benchmark Notes, which narrowed on their debut.

Bullet spreads closed about 1 to 2 basis points tighter in the two-year sector, while 10-year spreads came in by about 1 to 0.5 bp on Thursday, an agency trader said.

"It's been a little choppy, but for the most part we're slightly tighter," the trader said.

Callable issuance was strong, with step-up structures dominating the supply.

"There were a few fixed-rate deals at auction," the trader said. "[Federal Home Loan Banks] was pretty involved all day on their TAPS program, but...funding levels have gotten extremely tight, so it's pretty tough to trade in."

But investors were quiet outside of the primary callable market.

"[There's] not a whole lot going on in the secondary," the trader said.

Swap-led swings

Thursday's roller-coaster was riding on a bumpy day for swaps, as concerns about Europe's debt crisis jostled with expectations of strong U.S. jobs data to create uncertainty in the market.

"We were just tracking swap spreads as they came in," the trader said. "Swaps were tighter this morning, so spreads in agencies were tighter, then swap spreads kicked out at some point today before coming back in."

The front end of the yield curve held up especially well given the large injection of supply from Fannie Mae, the trader added.

The market has shown signs of better confidence this week, and investors will be watching Friday's payroll numbers to decide whether the confidence is justified.

"Once we get this unemployment number tomorrow, then we'll know," the trader said.

Fannie Mae sells two-years

Fannie Mae's new 1.125% two-year Benchmark Notes due July 2012 tightened about 2 bps to close at a spread of 28 bps over Treasuries.

The $5 billion deal priced at a spread of 30 bps over Treasuries. The notes sold at 99.975 to yield 1.137%. Price talk was at a spread of 31 bps over Treasuries.

Banc of America Securities LLC, Goldman Sachs & Co. and UBS Securities LLC were the lead joint managers.

"Fannie Mae went really well," the trader said. "It was pretty well dispersed."

Domestic investors took 59% of the notes offered, while Asian investors bought 26%. Central banks formed the largest bloc of investors, buying up 38.5% of the notes. Fund managers received 33.4% of the notes, while commercial banks bought 21%.

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