Agencies widen as Treasuries rally; FFCB's new $1 billion of five-years tighten on debut

By Kenneth Lim

Boston, Nov. 10 - Agency spreads widened slightly on Wednesday as Treasuries staged a rebound following a weak auction of 30-year bonds.

Federal Farm Credit Banks saw solid demand for its $1 billion offering of five-year notes, which tightened after arriving slightly wider than price talk.

Bullet spreads were 1 to 2 basis points wider over Treasuries across the yield curve, a trader said. Treasuries rallied Wednesday as bargain hunters shored up their positions before Thursday's Veterans Day holiday.

"Agencies are a touch wider," the trader said. "There was a little bit of selling earlier in the day, then in the afternoon the Treasury market picked up but agencies didn't seem to be able to catch up."

Trading volumes were decent with FFCB's deal providing some liquidity in the five-year sector as well as some last-minute trading ahead of the holiday.

"There was pretty good flow today," the trader said. "There were people trying to get some trades done before the holiday. The markets reopen on Friday, but a lot of people are going to be out, so it's going to be hard to get stuff done on Friday."

FFCB sells five-years

FFCB saw strong demand for its $1 billion offering of new 1.5% five-year Designated Notes on Wednesday.

The deal priced at a spread of 24.5 bps over Treasuries, slightly wider than initial price talk of 22.5 bps over Treasuries.

The notes were sold at 99.822 to yield 1.537%.

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

The notes closed at spread of about 23 bps bid, 23.5 bps offered.

"The Street was pretty happy with the deal," the trader said. "Everybody wants new five-years, so it was a great deal for everyone."

The widening from initial price talk was not a sign of weak demand, the trader added.

"It was wider because the market widened between price talk and pricing," the trader said. "But look at how the new five-years did on the day. That tells you demand was strong."

Mark Noble, head of agency at MF Global, said FFCB's deals usually get a good response from the market.

"They haven't been as active...but when they do have some supply, they do very well," he said.

Slow end to week

The past week has been relatively uneventful for agencies with investors more focused on Treasury auctions.

On Wednesday, the Federal Reserve also announced its buying schedule of Treasury notes as part of the new quantitative easing policy.

"Agencies were not the focus of everyone yesterday or today with all the Treasury auctions," he said. "All eyes were on the 30-year auction and then the buyback details from the Fed. So not surprising, we weren't the focus today."

The market may not be operating at full strength when it returns on Friday.

"Some people are taking the chance to get a long weekend," Noble said.

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