Agencies narrow; Fannie Mae plans three-year offering, surprises with five-year reopening

By Kenneth Lim

Boston. Oct. 27 - Agency spreads edged tighter Wednesday as another down session for Treasuries offset larger-than-expected supply from Fannie Mae.

Bullet spreads closed 0.5 to 1 basis point narrower versus Treasuries on the day, although trading volumes remained weak. Treasury prices fell Wednesday amid wariness about the Federal Open Market Committee's coming November meeting and a lackluster five-year auction.

"Really didn't do much today," one agency trader said. "On busy days for Treasuries, agencies are usually sleepy."

Callable issuance was also sluggish, with Federal Farm Credit Banks seen as the only major issuer on the day. Issuance usually picks up when rates increase because the better coupons are more attractive, but dealers this week already have too much on their plates.

"Dealers are pretty full in terms of inventories, so underwriting is pretty quiet," the trader said.

Uncertainty stemming from the week's Treasury auctions and next week's Fed meeting has also kept money on the sidelines.

"Not many people are willing to put chips on the table," the trader said.

Fannie Mae to sell three-, five-years

Fannie Mae on Wednesday announced two offerings of Benchmark Notes, surprising investors who had been expecting just one deal.

The agency plans to auction a $1 billion reopening of its 1.625% five-year Benchmark Notes on Thursday.

It will also price new three-year Benchmark Notes on Thursday, talked at a spread of 20 bps over Treasuries, market sources said.

The size of the deal has not been set, but it is expected to be at least $3 billion.

Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. and J.P. Morgan & Co. are the lead managers for the three-year offering.

"Everybody knew they were going to do a three-year, but there was a little bit of a surprise with the reopening of the five-years," the trader said.

The five-year sector widened by about half a basis point on the announcement, but the reopening should go well given the lack of supply in the sector.

"Wherever the offer side is, it should come there, maybe a little bit through," the trader said. "But I expect it to tighten after that. Five-years are 27 bps bid, 26 bps offered now. This time tomorrow, I'd say it's more likely to close at 26 bps to 25.75 bps bid."

The three-year offering, which is at a 1 bp concession to surrounding issues at price talk, should also see solid demand, the trader said.

"I don't see why it won't do well, although it's a little bit richer than the last time three-year paper came," the trader said.

Auctions dampen volumes

Agency investors could be waiting for the Treasury auctions to end Thursday before picking up their trading, the trader said.

Volatility in the market should settle once the auctions are completed, and investors will be more comfortable with looking at spread products, the trader added. There is a chance that rates will also be higher after all the supply that has been added, which could attract some buyers.

"Tomorrow afternoon will be busy, and after that Friday should be busy as well, with the auctions out of the way," the trader said. "People don't care about spread products when they have their hands full with the Treasury market."

Month-end activity may not be a major factor this time.

"Month-end extension is very, very small in agencies," the trader said. "I don't think it's going to have much of an impact."

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