Agencies close mixed as Treasury volatility keeps volumes low; FFCB offers five-year notes

By Kenneth Lim

Boston, Nov. 9 - Agency spreads ended mixed on a quiet Tuesday as investors tried to come to terms with a volatile Treasury market.

Federal Farm Credit Banks also announced an offering of new five-year Designated Notes, bringing some early cheer for investors who had been pining for some supply in the sector.

The front end of the yield curve widened versus Treasuries, while the long end narrowed slightly on Tuesday as Treasury prices declined.

"I'd consider it a mixed bag," an agency trader said. "The higher yield environment brought in buyers in the long end."

Secondary trading was muted amid the volatility, the trader added.

Callables had an active session, as the back-up in rates gave investors an opportunity to capture some yield following the previous week's Treasury rally.

There is "pretty good demand for callables," the trader said. "There's definitely a lot of pent-up demand for higher coupons, and the back-up in rates definitely brought buyers back into the callable market."

Ready to pounce

The enthusiasm for callables was not seen in the bullet space despite the back-up in rates, the trader said.

But the higher absolute rates mean that bullets are more attractive as well at this time, and hesitant investors may simply need a little bit more time to get a grasp on the recent volatility, the trader said.

"It might take a day or two for the market to digest the move," the trader said. "The back-up didn't bring buyers back to bullets, but that will happen."

Wednesday could turn out to be a busier day for agencies as investors try to get their trades done before Thursday's Veterans Day holiday.

"I think it's going to be busy in agencies tomorrow," the trader said. "People have been asking for higher yields, and now they've got them...Thursday is a holiday, then the next thing you know it's Friday, so there will be money being put to work tomorrow."

FFCB plans notes

FFCB plans to price new five-year Designated Notes on Wednesday, talked at a spread of 22.5 basis points over Treasuries, market sources said.

The size of the deal has not been set, but it is expected to be between $1 billion and $2 billion.

Goldman Sachs & Co., J.P. Morgan Securities LLC and RBC Capital Markets, LLC are the lead managers.

Price talk represented a concession of about 2 bps to surrounding issues, the trader said.

"That's a pretty good concession," the trader said. "People have been whining that there's no new paper in the five-year sector, so it's going to do very well."

The size of the deal probably will not be much more than $2 billion, the trader speculated. That is because although the funding cost on an asset-swap basis is favorable, FFCB could theoretically get cheaper funding from the callable market.

The deal is probably more to keep the Designated Bonds program liquid and as a bit of a gift to dealers.

"It's probably going to be their last one for the year, so it's probably a bit of a payback to dealers," the trader said. "It allows them to pay us back by giving us some feeds. There's no doubt that it's better for them in the callable market."

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