Agencies widen amid volatility; FHLB plans three-year note offering at slight concession

By Kenneth Lim

Boston, Nov. 16 - Agency spreads eased out slightly on Tuesday after a mixed session as the higher volatility in the market continued to deter strong bids.

Federal Home Loan Banks announced an offering of three-year Global Notes, with price talk seen as fair to slightly cheaper than surrounding issues.

Two-year bullet spreads closed the day about 1 basis point wider against Treasuries, while three-year spreads ended 1 to 2 bps wider. Five-year spreads also nudged outwards by about 0.5 bp.

"I'm going to call it mixed," an agency trader said. "In general we're very directional in terms of spread movement versus swaps."

The callable market finally caught a bit of a break with buyers emerging following the recent increases in absolute yields as well as a bit of mark-down by dealers. Excess inventory had been keeping the callable market on the quiet side for just over a week.

"It felt like there was some wholesale buying out there," the trader said. "We finally reached the point where...they've marked down what they have and that's attracted some buyers."

But the callable market remains rich, and secondary trading volumes have not been robust.

"There still seems to be a bit of secondary paper out there trading at significant discount," the trader said.

QE hangover

The agency market has been hit this week because of a pullback in fixed income markets.

"We've had such an uptick in volatility the last couple of days that agencies got whacked pretty good," the trader said. "I felt like the Street was pretty long."

Taking the cue of Treasuries, agencies rallied in the run-up to the Federal Reserve's announcement at the start of the month that the central bank will restart asset purchases to boost the economy. But the markets have since come down from those giddy highs.

"The rally leading up to the [quantitative easing] announcement gave way to buy on rumors, sell on news," the trader said. "That left the Street a little bit long."

Agencies have also been suffering from competing supply in corporates and municipals.

"There's a lot of supply from a lot of corporates and munis hitting the Street just before Thanksgiving," the trader said.

FHLB plans three-years

FHLB will offer some supply action for agencies on Wednesday with a $3 billion offering of new three-year Global Notes.

Price talk is at a spread of 17.5 bps over Treasuries, market sources said.

Deutsche Bank, J.P. Morgan and RBC Capital Markets are the lead managers.

The indicated spread is about half a basis point cheaper than surrounding issues, the trader said.

"It seems fair, but it's not really much of a concession versus where the Fannie Mae three-year priced," the trader said.

Fannie Mae priced three-year Benchmark Notes in October at a spread of 19.5 bps over Treasuries, which was about 1 bp over surrounding issues at the time.

The trader expects the deal to go well because demand for new issues, which are usually sold at a discount to existing paper, remains strong.

"People are clamoring for large bullet deals and new issues, so that should satiate some of the demand," the trader said.

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