Agencies narrow with swaps as callables keep active; FHLB talks 3-year offering at T+24 bps

By Kenneth Lim

Boston, Oct. 13 - Agency spreads tracked swaps slightly tighter on Tuesday as the market saw some buying off the previous week's weakness, although volumes remained thin.

Federal Home Loan Banks will add to supply on Wednesday with a new three-year Global Notes offering, which market sources said has a reasonable concession.

Bullet spreads narrowed slightly on Tuesday, said Mischler Financial Group vice president of institutional sales Michael J. Gladden.

"We've seen some tightening in spreads with the selling in Treasuries," Gladden said. "On the 10-years we're up from 3.12% to mid-3.35%. In the five-year area, we tightened maybe 1 or 2 basis points."

The addition of about 24 new issues, most of them callables, helped to give the market some life, he added.

"There's a little bit of skepticism buying even though we are off the lows in the five years," Gladden said.

Investors have been piling into callable products because there is strong demand for the spread, he explained.

"There's an overweight in spread products right now," Gladden said. "So they're not too fearful of the call feature at these rate levels. Taking the call risk seems to be worth the value."

Joseph Savoie, managing director of fixed income sales and trading at Northern Capital Securities, noted that swaps had been tightening.

"[Agency] spreads continue to grind in," he said. "Treasuries after a couple of days of sell off last week rebounded today. At the same time, swap spreads have been tightening."

Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial, added that the market was a little on the quiet side on Tuesday.

"I don't know if it's a hangover form the long weekend," he said.

FHLB to bring 3-years

FHLB said it will price new three-year Global Notes on Wednesday.

Price talk is at a spread of 24 bps over Treasuries, while the deal amount will likely be benchmark size of at least $3 billion, market sources said.

Banc of America, Credit Suisse and Deutsche Bank Securities are the lead managers.

The notes are non-callable.

An agency strategist said the deal appeared to carry a 4 bps concession to existing three-year agency debt.

"That's a reasonable pickup," the strategist said.

But FHLB's bullets are not as widely bought as those of Fannie Mae and Freddie Mac, and price talk did not appear spectacular in that light, the strategist said.

"It doesn't quite get the attention of Fannie Mae and Freddie Mac, and at that price it's OK, not crazy," the strategist said.

Equity-driven market

Mischler's Gladden noted that many investors may have already made their purchases the previous week and would be keeping an eye on corporate earnings before making the next move.

"Most investors bought last week," Gladden said. "They'll probably wait to see how the stock markets will do with earnings. I expect that to last another 10 days or so."

© 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.