Agency spreads narrow on year-end buying; FHLB talks three-years at Treasuries plus 37 bps

By Kenneth Lim

Boston, Dec. 8 - Agency spreads narrowed again on Tuesday as investors continued to seek out safe harbors for their money with the year coming to an end.

Federal Home Loan Banks announced a new $3 billion offering of three-year Global Notes that was seen to offer a slight concession to buyers.

Following Monday's spread contraction, bullet spreads were again slightly tighter on Tuesday on robust activity - given the time of the year, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

"We are actually seeing spreads moving in a tiny bit again today," Hurley said. "Good bids in the market and volumes have actually been pretty decent for a December when it could have a tendency to be a bit slow."

Agencies continued to issue callables at a brisk rate.

"Callables had a fair amount of new issues today," Hurley said, "especially step-ups. We are seeing a lot, a lot of step-ups."

Year-end movements

The tightening spreads this week are partly a result of investors looking for a place to park their money, Hurley said.

"With the low yields that we have right now, people who do have money to invest want to park it in something that's safe," she said. "And agencies are the next safest thing to Treasuries."

Thomas Urano, a principal at Sage Advisory Services, agreed that most accounts at the moment will not be looking to make any major moves.

"There's still some stuff getting done, but I think you're in a typical year-end slowdown here," he said. "It doesn't seem like the activity is above average, or above what you'd expect at this time of the year. I think most people right now...want to just close it out safe."

Even investors who want to look for trade ideas may not find many attractive options at the moment, Urano added.

"First of all there's not really much you can get done going into the end of the year," he said. "There's not a whole lot of positioning to do. When you look at the rest of the sectors, they're all really tight."

Investors are more likely to wait until the new year to get going again, he said.

"I was talking to someone who shorted mortgages a while ago and he got his arm chopped off," Urano said. "He said, 'I don't think it's going to go up another point, but I can't afford to let my other arm get chopped off.'"

FHLB plans three-years

FHLB plans to price $3 billion of new three-year Global Notes on Wednesday, talked to yield about 37 basis points over Treasuries, market sources said.

Banc of America, Citigroup and Goldman Sachs are the lead managers of the calendar offering.

The deal should do well because the short end of the sector is benefiting from lower fears of rising interest rates, Hurley said.

"Just looking at that sector of the curve, it should go well," Hurley said. "The shorter sector, with the Fed on hold [on interest rates] and Bernanke indicating that yesterday, the short end is anchored to what's going on with interest rates, so they're going to just continue to trade well."

Urano thought that price talk seemed reasonable and was a concession of about 5 to 6 bps.

"I think that's kind of consistent with where the Home Loans name is," he said. "I think the pricing is fair. It's right where it should be."

But the concession may not be as attractive to investors who already own the FHLB 1.625% notes due November 2012, he said.

"It gives a slight concession to swap around, but if you've already got exposure in there, it's marginal," Urano said.

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