Agency spreads narrow on roll trades, Treasury strength; FHLB three-years end unchanged

By Kenneth Lim

Boston, April 7 - Agency spreads tightened across the board on Wednesday on roll-off buying in the three-year sector and strong demand for new paper.

Bullet spreads closed about 1 to 2 basis points tighter across the yield curve, although three-year spreads were about 5 bps narrower at the end of the day.

"Everything rallied nicely, three-years because of the roll," said Craig Ziegler, an agency trader at Broadpoint. "I wouldn't say it was heavy volume, but definitely one-way."

A strong auction of 10-year Treasuries also helped the rally late in the day when profit-taking pressure threatened to take some of the shine off the early moves. The U.S. Treasury sold $21 billion of 10-year notes to yield 3.9% with a bid-to-cover ratio of 3.72 times.

"It was just a steady kind of buying," Ziegler said. "There was some sporadic profit taking toward the end of the day there, but everything just kind of ran up with the 10-years, which brought everything along."

Weak bullet volumes

Volumes, however, remained light as investors continued to be hesitant about making any major moves. Investors who just returned from a long weekend are still trying to figure out the recent stock market rally and new concerns about the credit strength of Greece, Ziegler said.

"You had the Good Friday holiday, so people kind of need to refocus and stuff," Ziegler said.

Callable issuance was more robust and continued at a brisk pace on Wednesday with a $1 billion three-year issuance by Fannie Mae capping the day.

"Callables were pretty good," Ziegler said. "[There were] a lot of smaller deals today, but step-up activity was probably the most pronounced. A $1 billion three-year non-call one year today from Fannie Mae was kind of the biggest issue of the day."

FHLB sells three-years

Federal Home Loan Banks' new 1.875% Global Notes due June 2013 ended flat at a spread of 23.5 bps after pricing at a richened valuation.

The $3 billion offering priced at an initial spread of 23.5 bps over Treasuries. The notes were sold at 99.72 to yield 1.966%. Price talk was initially set at 32 bps over Treasuries, but that was tightened to 30 bps late Tuesday.

Banc of America, Citigroup and UBS Securities were the lead managers.

"The new issue came very well-received," Ziegler said.

Ziegler did not think that the pricing was a surprise, noting that spreads narrowed sharply Wednesday morning.

"Everything tightened up ahead of pricing...It was so well-received upon announcement, it's not a surprise," he said.

The issue was "significantly oversold within hours," FHLB said in a press release.

Domestic investors received 46% of the allocations, with Asian buyers taking 25%. Central banks were the largest bloc of investors, with 46% of the notes offered. That was followed by fund managers with 35%.

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