Agency spreads close flat; FFCB talks new three-year bullets at Treasuries plus 34 bps

By Kenneth Lim

Boston, Oct. 26 - Agency spreads closed mostly flat on Monday as investors took time to assess a coming wave of supply.

Federal Farm Credit Banks announced an offering of new three-year Designated Bonds for Tuesday pricing, while rates markets will contend with about $116 billion of Treasury notes this week.

Bullet spreads traded within a tight range on Monday, an agency trader said.

"Spreads for the most part were trading within 1 to 2 basis points," the trader said. "We're right in line with swaps on the day."

Absolute yields improved slightly on weakness early in the morning, but investors were slow to take advantage.

"The investors who put money to work on the back-ups here are waiting to see what happens with the auction," the trader said.

The distraction of the Treasury auctions - "that's everyone's focus," the trader said - combined with the typical Monday doldrums to keep volumes thin.

"There's been a recent inclination, we've seen decent accounts buying on these back-ups, but for whatever reason, it's Monday, and people are waiting a little longer to see if the auctions this week push us a little bit further."

FFCB plans three-year deal

FFCB plans to price new three-year Designated Bonds on Tuesday, with price talk at a spread of 34 bps over Treasuries, market sources said.

The size of the deal has not been set, but it is expected to be at least $3 billion.

Banc of America Securities LLC, HSBC Securities (USA) Inc. and Morgan Stanley & Co. are the lead managers of the offering.

"It seems like a decent concession versus where surrounding benchmark paper is coming," a trader said. "Just looking at the last threes we had, which was [Federal Home Loan Banks] that came last month, that's trading in the mid-20s."

The market is expecting a "big" deal amount, and the offering will probably enjoy a strong response from investors, the trader added.

"Because they don't really have any kind of calendar, they basically come in when it's opportunistic for them, and can be driven by reverse interest, so they tend to be a little more scripted, so to speak, compared to Fannie and Freddie."

Supply a key theme

Investors will be carefully watching the supply picture in the week ahead, the trader said.

On the rates front, the Treasury will auction $44 billion of two-year notes on Tuesday, $41 billion of five-year notes on Wednesday and $31 billion of seven-year notes on Thursday.

"The rest of the week, I think, is going to be dictated by how the supply goes," the trader said. "I would love for one of two things to happen. Either we get a dip just before the supply and people come in and buy that and all the auctions go very well, or people sit tight, there's a little pullback with the supply, then people come back in."

The FFCB is the only additional agency supply expected for the week, the trader said.

"Aside from the Farm Credit deal, there's nothing to set up for in agencies," the trader said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.