Agencies narrow as FHLB sells $1 billion reopening of two-years; supply adds to volatility

By Kenneth Lim

Boston, Oct. 13 - Agency spreads tightened on Wednesday as Federal Home Loan Banks brought a smaller-than-expected offering of two-year Global Notes.

Bullet spreads closed about 1 to 1.5 basis points tighter across the yield curve, an agency trader said.

"Yesterday we were under a little bit of pressure," the trader said. "I think we tightened today because expectations of a new Home Loans deal were not met."

Callable issuance remained robust as absolute yield levels continued to rise Wednesday following another disappointing Treasury auction.

"Callable issuance has been good," the trader said. "Every day Home Loans and [Federal Farm Credit Banks] have been coming with new issues. There's pretty decent demand for callable products even though it's fairly rich at the moment."

Investors typically want to buy callables on any back-up in rates, although some dealers are getting stretched.

"Some dealers are already quite long on callable paper, so they might be a little defensive on issuance," the trader said.

FHLB reopens two-years

FHLB priced a $1 billion reopening of 0.875% two-year Global Notes on Wednesday to yield 0.438%.

The notes priced at 100.806614 through an auction.

There is now $4 billion outstanding in the note series.

The offering came at a spread of around 7.5 bps over Treasuries and ended the day at a spread of about 6.5 bps bid, 6 bps offered, the trader said.

"That went pretty well," the trader said.

The trader had been expecting a new three- or five-year offering based on Libor funding levels.

"A lot of guys felt the same, so when they announced the two-year reopening, threes and fives rallied, and threes and fives came in about 1 to 1.5 bps," the trader said.

The size of the reopening was also small enough to not make much of a dent in two-year spreads.

"The fact that they brought $1 billion only helped to tighten spreads in that sector," the trader said. "They came right through the offer side."

Supply pressures eyed

Trading volumes were nevertheless thin on Wednesday as investors kept on the sidelines to wait out the Treasury's final auction on Thursday.

The Treasury's three-year and 10-year auctions on Tuesday and Wednesday were seen as disappointing, which caused a spike in volatility in the markets, the trader said.

"A lot of people are waiting until we get through the supply," the trader said. "Maybe we'll see some stability and that will bring more people back into the market."

The longer end of the yield curve will probably benefit more from any pickup after Thursday's sale of 30-year Treasury bonds.

"If we can get through that, it's not going to be as crazy, and we could see a pick-up in the longer end," the trader said.

Federal Reserve chairman Ben Bernanke is expected to give a speech on Friday, but he may not reveal much beyond what is already known, the trader said.

"I think he'll watch what he says a little bit this time," the trader said. "I don't think there's going to be anything new in that speech."

© 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.