Agency spreads tighten as Treasuries slip; FHLB three-year Globals narrow in line on debut

By Kenneth Lim

Boston, Dec. 9 - Agency spreads tightened across the yield curve on Wednesday amid weakness in Treasuries, while Federal Home Loan Banks' new three-year Global Notes narrowed slightly in line with the rest of the sector.

Bullet spreads continued to hold firm against Treasuries, said Craig Ziegler, a trader at Broadpoint.

"Spreads are holding in," he said. "In the 10-year area they continue to improve a little bit, tighter by 1 bp or so. And the five-year stuff is about 2 bps better on the day. Another fine day for agencies."

Better swap spreads helped to give agencies a boost, he added.

"With swaps improving as well, the front end improved with swaps," Ziegler said. "Three-years had a roll adjustment today, so they were flat to outperforming swaps today."

Another agency trader said callable issuance remained robust, although new deal volume was short of the previous week's strong primary output.

"It's a decent day, but that's still kind of slow compared to where we were last week," the trader said.

FHLB prices three-years

FHLB's new 1.5% Global Notes due January 2013 tightened slightly on its first day of secondary trading on Wednesday to a spread of about 31 bps.

The $3 billion offering priced at a spread of 31.5 bps over Treasuries. The notes were sold at 99.909 to yield 1.53%. Price talk was initially at a spread of about 37 bps over Treasuries, market sources said.

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

"They came at 31.5 bps, right afterwards they traded at 31.5 bps, 31 bps," Ziegler said. "Everything tightened a little bit, so they tightened in unison and they're going out at 31 bps. It was nothing great."

The other trader said the deal "went well," although the market had been hoping for a better performance.

"We liked the deal," the trader said. "But it did not go near as well as we were hoping for."

The deal was oversold, according to a statement by FHLB. Domestic investors took 55% of the offering, followed by Asian investors with 20%. Investors in Europe bought 6% of the new notes.

Fund managers and investment advisors received 47% of the notes, while central banks took 32%, and financial institutions took 8%.

Rates, supply under watch

The Treasury market had a lackluster session on Wednesday because of a poorer-than-expected auction of 10-year Treasuries.

"We got the 10-year auction out of the way, so in terms of rates things should start looking pretty good," the agency trader said.

Thursday will see the U.S. government sell another $13 billion of a reopened 30-year bonds, and that could also have implications on agencies, the trader said.

"We have the 30-years tomorrow, so it may be pretty slow until that's done," the trader said. "After that it's home free. If those [30-years] aren't accepted very well, we may tighten further for the rest of the week."

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