Agencies tighten on Treasury rally; FHLB talks three-year Globals at Treasuries plus 37 bps

By Kenneth Lim

Boston, July 21 - Agency spreads narrowed on Tuesday as Treasuries rallied on reassuring remarks by Federal Reserve chairman Ben Bernanke.

Meanwhile, the market was expecting a small deal size for Federal Home Loan Banks' planned issue of global notes. The offering is talked at a spread of 37 basis points over Treasuries.

In trading the short end of the yield curve was in by about 2 bps, while the intermediate sector was about 5 bps tighter, said Mesirow Financial senior managing director of institutional sales and trading Joseph J. Riley. The further end of the curve contracted by about 7 bps. Five-year agencies ended narrower by about 5 bps, while 10-years were in by about 4 bps.

"We did have quite a rally in the Treasury market today," he said.

Bernanke boosts Treasuries

Fed chairman Bernanke on Tuesday assured Congress that the central bank will have the means to address inflation when the economic situation improves, but he said that in the meantime the Fed continues to take a cautious view of the economy and the benchmark interest rate will remain near zero for an "extended period."

Bernanke also said he does not expect inflation to balloon for the next two years.

"We rallied on Bernanke's statement to Congress that we're going to have an extended period of low interest rates," Riley said. "We remain in a very low interest rate environment and any thought that the Fed could ratchet interest rates soon is easing."

But the good news for Treasuries is not as bright for agencies, which are becoming richer.

"It's a very different atmosphere," he said. "Very, very low interest rates, and spreads are tight and getting to the point where people are looking elsewhere."

The strong supply of Treasuries will continue to pull the markets in the opposite direction of the Fed's buying of agency securities, Riley said. The Fed's support will likely continue for the foreseeable future, but how the market reacts when that support ends remains a big question, he said.

"Who knows what's going to happen to the market when they stop?" he said.

FHLB talks at Treasuries plus 37 bps

FHLB plans to price three-year Global notes on Wednesday, the agency said in a press release.

Price talk is at a spread of 37 bps over Treasuries, an agency spokesman said.

Banc of America, Citigroup and RBS Greenwich are the lead managers.

The market is expecting a $3 billion offering and the deal should see a strong response, Riley said.

"Wherever it comes, it's going to be a blowout, just like all the rest," he 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.