Agencies mark time ahead of non-farm payrolls data; Fannie Mae sells $4 billion five-years

By Kenneth Lim

Boston, March 2 - Agency spreads closed mostly unchanged on Wednesday as Fannie Mae added $4 billion of new supply in the five-year sector.

Bullet spreads ended the day mostly flat, with the 10-year sector underperforming slightly.

"10-years were a point wider, and the rest of the yield curve was mostly flat," an agency trader said.

Callables suffered from a lack of activity as investors hoped for better rates before buying again.

"Callables have been dead quiet," the trader said. "Guys are looking for a back-up [in rates]. It feels like the Street's a little bit long."

Fannie Mae sells five-years

Fannie Mae's new 2.375% five-year Benchmark Notes were the highlight of the quiet day, arriving at a spread of 30 basis points over Treasuries.

The notes closed the day at spreads of 29 bps bid, 29.5 bps offered.

"The main focus today was the new five-year deal from Fannie Mae," the trader said.

The notes were sold at 99.796 to yield 2.418%. Price talk was at a spread of 30 bps over Treasuries.

Barclays Capital Inc., Citigroup Global Markets Inc. and UBS Securities LLC were the lead managers.

Price talk was aggressive, the trader said, with hardly any concession to speak of. But the market was hungry for new paper in the belly of the yield curve with the majority of recent deals coming in the two- to three-year sectors. The order book reached around $8 billion before pricing, the trader said.

"It looked kind of rich, to be honest," the trader said. "Coming at 30 bps it looked to be fully priced, but there looked to be a lot of pent-up demand, especially from central banks."

Domestic investors took 66% of the offering, while Asian investors bought 14% and European investors received 4.5%, according to data from Fannie Mae.

Fund managers were the largest bloc of investors, accounting for 47.2% of the notes sold. Central banks took 28.2%, while commercial banks bought 11.4%.

Quiet anticipation

Investors were hugging the sidelines on Wednesday in anticipation of a key labor report on Friday, the trader said. Buyers were hoping that stronger-than-expected numbers could push rates higher and present a better opportunity to come back to the market.

"We've got non-farm payrolls coming later in the week, and clients have been keeping it dry, hoping that we'll get to higher yields later in the week," the trader said. "Guys are definitely looking to put money to work, though."

The same sentiment is affecting the callable market, and issuance could pick up if yields improve just slightly.

"If we get a trade-off tomorrow, I think there'll be a lot of activity in the screens," the trader said. "If we back up 3 to 4 bps from the levels that we're at, we could expect 10 to 15 fairly decent deals getting priced."

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