Agency spreads follow swaps tighter on Fed minutes; FHLB offers $3 billion three-year Globals

By Kenneth Lim

Boston, Feb. 17 - Agency spreads tracked swaps tighter on Wednesday on speculation that the Federal Reserve might want to sell its holdings of mortgage-backed securities.

The tightening came despite Federal Home Loan Banks' announcement that it will offer on Thursday $3 billion of new three-year Global Notes.

Bullet spreads closed about 1 to 2 basis points narrower across the yield curve on Wednesday, an agency trader said.

"Spreads in general were a little bit better," the trader said. "We saw better buying yesterday and into today."

Callable issuance was robust after a relatively slow Monday, the trader said.

"Callables are generally tighter on a little bit of a selloff on spreads and lower volatility," the trader said. "There's good interest in two- to three-year callables, and stuff being done in the regions up the curve. We're still seeing a steady flow of callables because there's a ton of paper getting called, and redemptions are very high, so a lot of people get cash in the pockets that they want to put back in callables."

Fed may sell non-Treasury holdings

Minutes from the Federal Reserve's Federal Open Market Committee also played a role in the day's action, the trader said.

"When the news came out that the Fed minutes suggested that they wanted to eliminate some of the mortgage-backed securities out of their portfolio, swap spreads tightened up and we kind of followed along with it," the trader said.

Fed committee members wanted to eventually rid the Fed's holdings of mortgage-backed securities and agency debt - retaining only Treasuries - and most supported gradual asset sales to achieve that goal, according to the FOMC minutes.

Despite Wednesday's tightening, agency spreads appear to be rangebound, the trader added.

"There's not a lot to get excited about right now," the trader said. "You see a lot of buyers kind of pull back. Buyers will sit back and wait for pullbacks. We've also turned into a bit of a rate-trading environment. Spreads are constant, so buyers will buy on a backup in rates."

FHLB sees strong response

FHLB plans to price $3 billion of new three-year Global Notes on Thursday, with price talk at a spread of 27 bps over Treasuries, market sources said.

JPMorgan, Morgan Stanley and UBS Securities are the lead managers.

The offering was well within market expectations in terms of size and sector, and investors seemed to be enthusiastic about the new paper, the trader said. The issuance will be the first benchmark-sized bullet offering in three weeks following passes by Fannie Mae and Freddie Mac.

"The sense I got...was the books were pretty good and they closed up early," the trader said.

Price talk was around a 2 bps concession over surrounding issues, the trader said.

"It's fairly priced," the trader said. "They didn't need to make it extremely cheap."

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