Agencies widen as Fannie Mae brings $7 billion of three-year supply; payroll data eyed

By Kenneth Lim

Boston, Aug. 4 - Agency spreads widened across the board on Wednesday as Fannie Mae added $7 billion of supply in the front end of the yield curve.

Bullet spreads were "a touch wider in five-years and in and probably a bip tighter in sevens and out," Wall Street Access trader Michael Skinner said.

"The agency curve continues to flatten," he said.

Callable activity was robust, with a fair amount of medium-term notes being printed, he added.

"There were a lot of deals," Skinner said.

Trading volumes, however, slowed down from a busy Tuesday.

"I can't say it's been a terribly busy day," he said. "It was a pretty slow day. It certainly feels like a summer trading session for sure."

Fannie Mae sells three-years

The highlight of the day was Fannie Mae's $7 billion issuance of three-year Benchmark Notes.

"It was well-oversubscribed," Skinner said. "It was a $7 billion deal, and I heard the book was up to $9 billion and change."

Fannie Mae priced the 1% notes due 2013 at a spread of 23.5 basis points over Treasuries. The notes were sold at 99.825 to yield 1.057%.

Price talk was at a spread of 24 bps over Treasuries.

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

The new paper held firm on the day, closing at spreads of about 23 bps bid, 22.5 bps offered.

"Certainly the deal was received fairly well," Skinner said.

The size of the deal was large, considering that Fannie Mae also sold $1 billion of five-year notes on Tuesday in a reopening, and investors welcomed the new supply, Skinner said.

"A lot of accounts have been clamoring for paper at the front end because Fannie and Freddie have passed the last time around," he said. "There's a lot of pent-up demand."

Fannie Mae said fund managers were the largest bloc of buyers in the offering, taking up 58.4% of the notes offered. Central banks bought 31.9% of the offering, followed by commercial banks with 4.1%.

Domestic investors received 65.3% of the notes, while buyers in Asia took 18.9%. European investors were allotted 1.4% of the notes.

Payrolls top concerns

Investors are closely watching Friday's non-farm payrolls and unemployment data to get a sense of where the bond markets are headed, Skinner said.

"For as long as I can remember, unemployment is one of the most important, if not the most important, pieces of data in the bond market," he said.

Investors are particularly concerned this time because of the perceived weakness in the economy.

"Potentially coming out of this May recession, if you will, they will be very closely examined," Skinner said.

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