Agencies narrow as yield hunters step up; callable sales spike on year-end buying, trader says

By Kenneth Lim

Boston, Oct. 6 - Agency spreads tightened slightly Tuesday as investors bought yields and short-term callables.

"Spreads for the day are tighter by 1 basis point, really not much changed," said Christopher White, senior vice president of fixed income sales and trading at Moors & Cabot Capital Markets.

The 1.625% Federal Home Loan Banks notes due September 2012 closed unchanged at a spread of about 22 bps, while the 3.75% Freddie Mac notes due March 2019 also ended flat at a spread of 41 bps, White said. The Fannie Mae 1.75% notes due March 2011 were 25 bps under two-year Treasuries.

"I think we're seeing sovereigns, a lot of banks coming in and capturing coupon right now if they can," White said.

Callable issuance also spiked, with FHLB selling nine Global-sized deals of at least $250 million each. The largest deal was a $1.8 billion series of two-year callables, according to data from FHLB.

"People are looking for a little more optionality on the short end than in recent months," White said. "I think some of that's because of year-end."

Overseas buying also helped to spur bids early in the day as some widening in the FDIC-guaranteed space drew attention.

"There was some European buying earlier this morning," White said. "A lot of people think any widening in the FDIC space might be an opportunity, and some people think the FDIC paper will actually tighten through agencies as more European accounts get approval to trade [Temporary Liquidity Guarantee Program] paper."

White did not think that greater demand for bank-issued paper with a government guarantee under the TLGP will necessarily lead agency spreads to widen.

"There will be greater demand in the space and those are different names," he said. "But I think they'll trade better than straight agencies comparably."

The Treasury market was also less hectic on Tuesday, which helped the agency universe to get back some of the spotlight.

"The Treasury curve seems to be stopped up a little bit right now," White said.

Fannie Mae announcement due

Fannie Mae is slated to announce on Wednesday whether it will issue new Benchmark Notes, and it could come with a new two-year issuance, an agency strategist said.

"I think they could be coming with new two-years," the strategist said.

"They haven't added anything in that sector since April, the curve is quite steep in that sector, so they might actually do it this time instead of just reopening. The past two times they've reopened older notes, so maybe they could reopen again."

The rest of the market could also be expecting something at the short end of the yield curve, the strategist said.

"Two years were a little wider today, that could be in anticipation of the Fannie Mae announcement, so maybe I'm not the only one who thinks like this," the strategist said.

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