Agencies widen as FHLB skips issuance; volumes low amid high corporate issuance, uncertainties

By Kenneth Lim

Boston, Jan. 18 - Agency spreads closed slightly wider on Tuesday as the quiet market continued to suffer for lack of a strong bid.

Federal Home Loan Banks said it would not issue new Global Notes in January, dashing hopes of some primary market-led activity.

Bullet spreads ended the day about 1 basis point wider than Treasuries, said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

"It was a fairly quiet day as far as spreads were concerned," she said.

Callable activity was also slower with investors slow to return after the Martin Luther King Jr. Day long weekend.

"We saw a number of issues, but as far as compared to other days, today has been fairly light," Hurley said. "We definitely had issuance, but not to the magnitude that we have had in previous days."

FHLB skips issuance

FHLB will not issue new Global Notes this month, the agency said in a press release Tuesday.

The housing finance agency had a calendar announcement on Tuesday. Its next calendar slot is on Feb. 15.

The announcement came as a bit of a surprise for the market, which had been expecting a front-end offering, Hurley said.

"I was not looking for that," she said. "I was expecting them to come with an issuance. I think this shows that they've got ample funds and they continue to come to market with a large callable set of offerings."

FHLB paper narrowed slightly on the news, while FHLB callable debt narrowed by about half a basis point, Hurley said.

The agency will probably be doing most of its fundraising through callables this month, even though bullets in general are cheaper for issuers, Hurley said.

"They certainly haven't had a problem in the past moving their benchmark, non-callable offerings, so it was a little bit of a surprise," she said.

Nevertheless, FHLB's callable debt has also been seeing good demand, she added.

Volumes fail to pick up

The agency market continues to face lackluster volumes, and the problem may persist for the rest of the month, an agency trader said.

"Unfortunately, I think this is going to be a very quiet month for agencies," the trader said.

An abundance of corporate supply has been one of the bigger reasons for the inactivity, the trader added.

"What we've seen so far has been a willingness to take on more risk, and when that happens and corporate issuance is high, investors spend more of their time looking at assets other than agencies," the trader said.

Uncertainty about the future of Fannie Mae and Freddie Mac could also have a slight impact on volumes. The White House is expected to offer an update on its review of the housing agencies by the end of the month.

"I guess we've got another two weeks or so before we get the next update on the [government-sponsored enterprises], so I can see how some investors will wait a couple of weeks just to avoid any kind of headline risk," the trader said.

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