Agency spreads tighten as market comes back to life; FHLB talks new 3-years at T+28 bps

By Kenneth Lim

Boston, Sept. 9 - Agency spreads rose Wednesday as investors shook off the summer cobwebs and Federal Home Loan Banks announced a new three-year deal.

Bullet spreads were about 2 basis points tighter in the two- and five-year sectors, while three-year spreads contracted by about 1 bps, said Mark Noble, head of agency at MF Global.

"Agencies are doing really well," he said. "Accounts got into the swing of things today, agencies were really well bid."

The pickup in activity was a sharp contrast to previous weeks, as the typical summer doldrums and the Labor Day holiday kept volumes extremely thin.

"It felt like a lot of activity in benchmarks, compared to all of basically the last two weeks," Noble said. "Investors are back and they're ready to buy."

FHLB to price three-years

FHLB announced that it plans to price new three-year Global Notes on Thursday. The offering is talked at a spread of 28 bps over Treasuries, market sources said.

The size of the deal has not been announced, but it will be benchmark size, which is at least $3 billion.

Citigroup, JPMorgan and UBS Securities are the lead managers, with HSBC Securities a senior co-manager.

The price talk implies a concession of about 1 to 2 bps, Noble said.

"Obviously I think it's coming from the tighter end of concessions," Noble said. "I think they're trying to attract some yield buyers in the three-year sector in general."

The deal looked like it had something for both the issuer and for buyers, he added. For the agency, seeking funding in the three-year sector looks like a good move with funding levels currently at around 15 bps below Libor. Two-years are around Libor minus 10 to 12 bps, while five-years are around Libor minus 2 to 4 bps.

"I think it's got a lot of things going for it," Noble said.

Treasury auction goes well

The Treasury on Wednesday also had a strong auction of $20 billion of 10-year notes, which comforted fixed income investors after Tuesday's sale was also successful.

The government sold the notes at a high yield of 3.51% and a bid-to-cover ratio of 2.77.

Calling the 10-year offering "another shockingly good auction," Cantor Fitzgerald chief fixed income rates strategist George Goncalves said the market "zeroed in (or chased) on that 3.5% handle."

"Being a bond bull I sit here in amazement on how well the bond market trades given chunky auctions and 'healthy' risk markets," he wrote in a note. "The curve is getting to attractive levels again to add to flatteners and the fact these auctions clear just fine outright tells me that 'yield grab' is the next new thing."

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