Agencies widen on profit taking; FFCB sees strong demand for $1.3 billion of three-years

By Kenneth Lim

Boston, Jan. 14 - Agency spreads eased slightly wider on Friday as investors took profit after a strong week.

Federal Farm Credit Banks sold $1.3 billion of new three-year notes in a deal that did well despite aggressive pricing by the underwriters.

Bullet spreads closed a tad wider versus Treasuries on the day, said Michael Skinner, an agency trader at Wall Street Access.

"Spreads widened out a touch today, maybe a bip," he said. "But considering how impressive they were all week, it was probably a bit of profit taking and a bit of supply."

The callable market remained slow, with demand muted amid recent volatility in rates.

"Callables have been quiet compared to benchmarks," Skinner said. "I think investors wanted to make sure some of this volatility kind of came off, but as spreads continue to tighten here, I think callables will pick up as investors look for incremental yield pick-up."

Weak volumes

The agency market headed into the Martin Luther King Jr. Day long weekend on a mostly positive note after spreads tightened for most of the week.

"Agencies performed very well this week," Skinner said. "Investors seem to be putting risk products back on."

The outperformance over both Treasuries and swaps offered some relief in the new year after a poor December.

"Spreads have outperformed Treasuries, and it seems like in January we're reversing some of the December trades."

The main blemish on the week's performance is the low trading volume, which raises the possibility that the tightening may not be as widespread as end-of-day levels suggest. Friday's slight profit taking also took place amid thin trading.

Still, the market will take what it can.

"Some of these moves have been made on smaller volumes, but certainly spreads have rebounded from December," Skinner said.

FFCB sells three-years

FFCB sold $1.3 billion of new three-year Designated Notes on Friday at a spread of 22.5 basis points over Treasuries.

The 1.125% notes were sold at 99.803 to yield 1.19%. Price talk was at a spread of 22.5 bps over Treasuries.

Barclays Capital Inc., Credit Suisse Securities (USA) LLC and Jefferies & Co., Inc. were the lead managers.

The notes tightened by about half a basis point during the day before closing flat, Skinner said.

The deal saw good demand even though it was aggressively priced, he added.

"I thought it priced tight, but it went out where it was priced, so they obviously found the demand for it," he said. "I'm surprised that they targeted it as rich as they did, because usually Designated Bonds will come with a little bit more concession."

The issuer may have gotten that kind of pricing because of demand for agency paper that is not housing-related.

"Farm Credit since the housing crisis has been seen as a way to diversify as an Aaa name and still an agency name," Skinner said.

Looking ahead, Federal Home Loan Banks has a calendar announcement on the issuance of Global Notes on Tuesday, when markets reopen.

The developing debt crisis in Europe will be at the top of investors' minds when they return. The coming week will also be light on the economic data front, but investors will be looking for any clues about where the economy is heading.

"Tuesday, we'll see what the markets have done during the holiday and we'll look at the data...to see if there are some signs that the economy is improving," Skinner 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.