Agencies mostly flat as volatile rates distract investors; FHLB tightens two-year pricing

By Kenneth Lim

Boston, Feb. 16 - Agency spreads remained flat on Wednesday as investors focused on a well-received offering of two-year notes by Federal Home Loan Banks.

Bullet spreads closed unchanged after an uneven day for rates amid uncertainty about Iranian warships near the Suez canal.

"Spreads are kind of unchanged on the day," said Wall Street Access trader Michael Skinner. "We walked in a little tighter, then they widened back out by the time we walked out."

The callable market remained sluggish. Skinner said expectations of higher coupon levels may be keeping some investors away from buying.

"Customers have been looking around, but I think the concern for the entire spectrum of fixed income right now is that if they hold out they're going to get better rates," he said.

Investors will probably come back to the market at some point, regardless of where rates go from here, Skinner added.

"Everything you read these days is positive for equities, and that may be the case for the next three months or so, but at some point you're going to see guys dip their toes in fixed income again," he said.

FHLB sells two-years

FHLB priced $3 billion of two-year Global Notes on Wednesday at a spread of 16.5 basis points over Treasuries.

The 1% notes were sold at 99.958 to yield 1.02%. Price talk was at a spread of 17 bps over Treasuries.

Citigroup Global Markets, Morgan Stanley and UBS Securities were the lead managers.

The notes saw a strong response from investors, with price talk initially set at 18 bps over Treasuries before being tightened to 17 bps over Treasuries late Tuesday. The domestic book was filled by the time the market closed Tuesday.

"That was the highlight of the day," Skinner said.

The notes traded as tight as 16 bps over Treasuries on Wednesday and went out at a spread of about 16.5 bps.

Domestic investors bought 61% of the offering, while Asian investors took 16%, FHLB said in a press release. Central banks formed the largest bloc among buyers, receiving 33% of the notes offered. Investment advisers and fund managers bought 31% of the deal, while financial institutions were quieter than normal with just 9% of the deal.

Volatility rocks rates

The agency market took a bit of a back seat to the Treasury market on Wednesday amid concerns that a new dispute may be brewing between Israel and Iran.

"Rates had a volatile day initially with the Iran carrier going into the Suez, and then the market backed off a little bit in the afternoon," Skinner said.

Israel's foreign minister Avigdor Lieberman on Wednesday said in a speech that his country could not "forever ignore...provocations" by Iran, which he said was sending two warships through the Suez to Syria. Israel defense minister Ehud Barak later struck a less aggressive tone, saying that the Defense Ministry "had preferred to ignore" the issue but had alerted "friendly nations" in the region.

Treasury prices rose early Wednesday but slipped in the afternoon to end the day mostly lower.

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