Agency spreads widen with new supply in pipeline; new Farm Credit five-years tighten on debut

By Kenneth Lim

Boston, Aug. 18 - Bullet agency spreads widened on Tuesday as investors took in a fair bit of supply this week.

Bullet spreads were wider by about 5 basis points across the yield curve on light volume, said Jefferies & Co. head of U.S. government agency Michael S. Effron.

"You know, today was actually pretty quiet," he said.

Callables followed bullets out, with a little more than $1 billion in new issuance, about double the amount on Monday, Effron said.

"Spreads opened a little today, we did see a fair amount of new issuance," he said. "Today we saw good secondary buying."

Farm Credit sells five-years

On the non-callable front, Federal Farm Credit Banks added $1.1 billion of new five-year Designated Notes to supply with a deal that priced at a spread of 60 bps over Treasuries.

Barclays Capital Inc., J.P. Morgan Securities Inc. and Morgan Stanley & Co., Inc. were the lead managers, with Goldman, Sachs & Co. as co-manager.

The new notes tightened by about 2 bps in trading on Tuesday.

"Farm Credit always does well," Effron said.

He thought that the FFCB deal was priced fair, noting that the spread was more than 10 bps over Fannie Mae's five-year offering the previous week. Fannie Mae on Aug. 13 priced $3 billion of five-year Benchmark Notes at a spread of 43.5 bps over Treasuries.

"It's a little bit of a concession," Effron said.

Another agency trader said the FFCB notes were a welcome addition to supply, but did not think that they were significant market movers.

"None of the agencies really need to do a lot of funding right now, so any time we can get a bit of new issues to give some liquidity to a sector it's positive," the trader said. "But a $1.1 billion deal isn't a market mover. It gets absorbed by the market pretty easily."

FHLB could issue in short end

Federal Home Loan Banks has an issuance announcement scheduled for Wednesday on its Global Notes.

The agency could issue in the two- to three-year sector, Effron said.

"I think it's going to be priced in the context of the market," he said. "That's where their funding needs are."

Issuers do not really need to raise large amounts at the moment, and the longer end of the yield curve is not as attractive, Effron explained.

"It doesn't seem like anyone really has any real appetite to go beyond five years," he said.

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