Agency spreads widen slightly on overseas pressure; Fannie Mae plans to sell two-year notes

By Kenneth Lim

Boston, Oct. 7 - Agency spreads expanded slightly Wednesday on foreign selling and general weakness in the fixed-income universe, but volumes remained extremely thin.

Fannie Mae could provide a jolt in the arm to the market on Thursday with a new offering of two-year Benchmark Notes.

"We saw a little bit of widening of spreads as it relates to agencies," said Thomas L. di Galoma, Guggenheim Capital Markets head of U.S. fixed income rates trading. "Corporate credit was widening a little bit today, and we did see some of that come in to agency spreads."

Selling pressure also came from overseas accounts, di Galoma said.

"We're seeing some foreign-bank selling in the agency market, that's also why we saw some widening," he said.

But di Galoma described Wednesday as "very quiet in late trading" for agencies, a view echoed by another agency trader.

"It was exceedingly quiet today," the trader said. "Two-year is pretty much unchanged. Five-year is pretty much unchanged. Not a whole lot going on today. There just hasn't been much volume."

The trader said the agency market's richness is partly to blame.

"Whenever you get the markets really strong it's hard for some accounts to pull the trigger, so they just sit back and watch what happens," the trader said.

Fannie Mae to sell two-years

Fannie Mae plans to price a series of two-year Benchmark Notes on Thursday, according to an announcement by the agency.

The size and coupon of the deal has not been set, but price talk is at a spread of 24 basis points over Treasuries and a deal amount of at least $3 billion, market sources said.

Banc of America Securities, Citigroup Global Markets Inc. and J.P. Morgan & Co are the lead managers of the offering.

Di Galoma said the deal appeared "reasonably priced."

"Fannie Mae usually prices things pretty reasonably," he said.

One agency trader said the deal was what the market had been predicting.

"I think that was exactly what guys on the Street were expecting," the trader said. "Nobody was surprised at all."

The lack of surprise may have been the reason that the market did not have a big reaction to the announcement, the trader said.

"I think most of the reaction came yesterday," the trader said. "We saw some selling in two-years yesterday, the sector actually widened out partly in anticipation of today's announcement. I think if Fannie Mae had announced a deal in a different sector or reopened an existing one, things would have been a little different. More of the same doesn't move markets."

Volatility, tightening ahead

The trader said the market could see some volatility in the week ahead as investors digest corporate earnings.

"Personally, I think earnings is a big reason why things are kind of stuck right now," the trader said. "The market's waiting for more clues about the economy before they make their final push for the year-end. Spreads are going to be stuck in a range for a while; you're going to see some volatility as the market tries to find its way out of the range."

Di Galoma expects some tightening during the quarter.

"Our outlook for agency spreads is actually for some firmer price action," he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.