Agency callables tighten amid strong issuance; bullets ease; Fed buys $1.9 billion

By Kenneth Lim

Boston, Aug. 7 - Callables continued to dominate activity in the agency market on Friday on a massive wave of new issues, market sources said.

Callable spreads tightened, while bullet spreads eased further. Bullet spreads at the short end widened by about 0.5 basis point, while spreads expanded about 0.75 bps further out the yield curve, an agency trader said.

"Spreads widened a little bit today, which is a little unusual with the Fed's buybacks," the trader said.

The Federal Reserve Bank of New York on Friday bought $1.937 billion of agency securities through its open-market operations, according to data from the Fed. A total of $3.873 billion of securities were submitted.

The securities that were bought were in the further part of the yield curve, maturing in 2016, 2017, 2018, 2029 and 2030.

The amount that was bought by the Fed was more than 70% higher than the last two operations that targeted the sector, noted Cantor Fitzgerald chief fixed income rates strategist George Goncalves in a research note.

"The $3.9 billion submitted was nearly double so that helps to explain the larger takedown as perhaps some of the bids were on the cheap side," he wrote.

The Fed's buying focused on the part of the yield curve that was still relatively cheap, Goncalves added.

"This part of the curve was trading cheap on a fair-value basis and has been protractedly cheap during the buybacks versus the frontend," he wrote.

Callables keep market busy

But the story of the day was the flood of new callables that kept investors busy. One trader counted more than 40 callable offerings on Friday.

"It was a very busy day today, a lot of issues underwritten," a trader said.

The issuance comes as funding spreads are contracting at the agencies.

"With [Federal] Home Loan Banks at least, the funding spreads are definitely tightening," a sellsider said. "But they're not keeping up with the Treasury market in terms of cheapness."

The aggressive issuance was not highly anticipated, but more will be welcome next week, the sellsider said.

"Hopefully it's a continuation of today," the sellsider said.

Slow start ahead

Spreads widened over the week, but yields actually improved, an agency trader said.

"It was a good solid week in terms of yields," the trader said. "Yields are higher than when they started. Spreads moved out, but we're still well within the range that we're comfortable with."

Another trader said the week ahead could see light volumes in the first few days because of the Fed's Federal Open Market Committee meeting on Aug. 11 and 12.

"With the Fed meeting, typically we see a slowdown with customers waiting to see the language," the trader said. "We could see a little bit lighter activity until Wednesday."

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