Agency spreads widen as Treasury yields drop; FFCB to offer five-years, FHLB announcement due

By Kenneth Lim

Boston, Aug. 17 - Agency spreads widened Monday as Treasury yields surged ahead on concerns about the economy.

Five-year spreads were about 4 to 5 basis points wider, while spreads in the 10-year sector were about 2 to 3 bps wider, an agency trader said.

"We saw the most widening in the five-year sector," the trader said.

The most active five-year bullet was Fannie Mae's 3% notes due September 2014, which saw spreads widen by 4.8 bps to 47.8 bps, according to data by Tradeweb. Among 10-years, Freddie Mac's 3.75% notes due March 2019 widened by 2.7 bps to a spread of 43.4 bps.

Volume in general was thin, with activity typically slower in the summer and new issuance easing.

"It's been pretty thin the last couple of days," the trader said. "We haven't had a lot of new issue stuff."

Playing catchup

The widening had more to do with Monday's rally in Treasury prices than with agencies themselves, the trader said.

"Treasuries have rallied...since the employment numbers, they're still very good," the trader said. "Basically agencies can't keep up."

Another agency trader said agencies could tighten further if Treasury yields remain low.

"I think it could," the trader said. "Incredible as it seems, some of the agencies, especially three years and out, could have some room to tighten even further. Even the two-years could narrow a little bit."

The second trader said the dwindling agency supply situation and the Federal Reserve's weekly purchasing program of agency securities has been largely driving recent spread contraction.

"Investors want agency paper, some investors want agency paper because they think they can sell to the Fed, the Fed is taking some paper out of the market, and at the same time the GSEs themselves aren't raising that much because they don't need to," the trader said. "I'd love to tell you what the market should look like when more normal conditions return, but frankly, what's normal now?"

FFCB to issue five-years

Monday's spread expansion was also in anticipation of new supply coming this week, with both Federal Home Loan Banks and Federal Farm Credit Banks expected to issue notes, the second trader said.

FFCB on Monday announced that it will offer new five-year Designated Bonds to settle Aug. 21. The size of the deal has not been determined.

Barclays Capital Inc., J.P. Morgan Securities Inc. and Morgan Stanley & Co., Inc. are the lead managers, with Goldman Sachs & Co. as the co-manager.

FHLB has an announcement scheduled for Wednesday on its August bullet Global Notes issuance.

"We've seen quite a lot of new five-year supply, and there's more coming," the trader said. "Most of the new deals are coming with quite good concessions, so that puts a bit of pressure on the existing paper."

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