Bullet agencies wider on profit taking, callables tighten; FHLB ends flat after strong start

By Kenneth Lim

Boston, July 22 - Bullet agency spreads ended slightly wider on Wednesday on profit taking, while Federal Home Loan Banks' new three-year Global notes eased after a strong start.

Bullet spreads were in by about 2.5 to 3 basis points across the yield curve on Wednesday amid light volumes, an agency trader said.

"I guess there was some profit taking," the trader said.

Spreads are no longer closely tracking swaps, the trader noted.

"I haven't really seen an in-line move in spreads versus swaps," the trader said. "I think they've somewhat detached. But we also haven't seen swings in swap spreads, and things have been kind of stable."

Callables contracted, reversing some of the recent widening.

"Callable spreads continue to tighten in because of the drop in volatility," the trader said. "We've expanded the last few days. There's a tightening bias in swap spreads."

FHLB prices Globals

FHLB priced $4 billion of three-year 1.75% Global notes richer than price talk, at a spread of 35 bps over Treasuries. It was expected at 37 bps.

The agency said the deal was oversubscribed.

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

Three-quarters of the deal was sold in the United States, with 7% sold in Asia, 6% in Europe and 12% in other parts of the world, according to data from FHLB. Fund managers took 67% of the notes, with central banks taking 11% and financial institutions 10%. Insurance and pension funds bought 7% of the Globals, while state and local governments bought 2%.

The notes ended at a spread of about 35 bps bid, 34.5 bps offered, the trader said.

"The three-years priced and started trading pretty well at the start of the day, but later on they widened out," the trader said.

Fed support still key

The Federal Reserve is expected to announce its next open-market purchase of agency securities Thursday, which it has been doing weekly.

The trader said agency spreads are likely to continue seeing that support from the Fed for some time.

"I think they've only bought up half of what they're expected to buy, so they have a ways to go in that department," the trader said.

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