Agencies narrow with swaps; Fannie Mae sells two-year notes, FFCB plans three-year paper

By Kenneth Lim

Boston, Jan. 13 - Agency spreads closed slightly tighter on Thursday in line with swaps as lower absolute rates pushed investors out on the risk curve.

The primary market had a busy day, with Fannie Mae getting a strong response to a $5 billion sale of two-year notes, while Federal Farm Credit Banks announced a three-year deal that is also expected to go well.

Bullet spreads mostly tightened on Thursday, with the curve coming in pretty evenly throughout. Two- and five-year spreads narrowed by about 1 basis point, while seven-year spreads tightened by half a basis point. Spreads in three-year paper closed flat on the day. Ten- and 30-year spreads were in by 1 to 2 bps.

"It was mostly a direction move with Treasuries," an agency trader said. "Lower yields brought in swap spreads and tightened us up. Volumes weren't huge, but definitely the new issuance helped a bit."

One market source said agencies were following the lead of the swaps market.

"Agencies seem to be hanging in there versus swaps," the source said.

Callable activity was slightly better on a day-to-day basis but remained muted when compared to the last quarter of 2010, the source said.

"Callables clearly slowed down just on the back-up in rates and not having the reinvestments that you were having a few months ago," the source said. "But we're seeing pretty good demand in the last 48 hours...as the market rallies here. We're seeing an increase in levels of callable activity on the fringes, but nowhere like what we saw last year."

Fannie Mae sells two-years

Fannie Mae priced $5 billion of new 0.75% two-year Benchmark Notes on Thursday at a spread of 21.5 bps over Treasuries.

The notes were sold at 99.846 to yield 0.824%. Price talk was at a spread of 22 bps over Treasuries.

Barclays Capital Inc., J.P. Morgan Securities LLC and UBS Securities LLC were the lead managers.

The notes saw good demand and narrowed over the day to close at a spread of 20 bps.

"The new issue was very well received by the market," the source said. "The market was very supportive."

The deal saw strong interest from domestic fund managers, with U.S. investors receiving 56.8% of the notes. Asian investors took 19.4% of the offering, according to data from Fannie Mae.

Fund managers bought 49.6% of the offering, while central banks accounted for 40% of the demand.

FFCB plans offering

FFCB also announced an offering of three-year Designated Notes to be priced on Friday.

Price talk was at 22.5 bps over Treasuries.

"At that level it's about plus 1 bp to benchmarks," the trader said.

The announcement by FFCB was unexpected, in the sense that the agency does not have an issuance calendar like Fannie Mae. That caused the three-year sector to underperform slightly on the day.

But the FFCB offering is expected to see strong demand, given the agency's strong credit rating.

"People like the Farm Credit name, and they especially like the ones that come at that part of the curve," the trader said. "It'd going to be like $1 billion or $2 billion or whatever, but it's going to go fine."

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