Agencies widen on profit taking; Treasuries rally; FHLB narrows talk on two-year offering

By Kenneth Lim

Boston, Feb. 15 - Agency spreads widened slightly on Tuesday amid profit taking and a rally in Treasuries.

Federal Home Loan Banks ended its three-month issuance drought with an announcement of a $3 billion two-year offering of Global Notes, which saw strong demand during marketing.

Bullet spreads closed a touch wider, stepping back from the strong tightening over the past week.

"The market has underperformed on the day," an agency trader said. "It's a little wider against Treasuries primarily due to a little bit of profit taking after the recent tightening."

The callable market remained muted with dealers still trying to move inventory in the face of higher interest rates that make older coupons look less attractive.

"What I've sensed in the last month or so is a lot of guys sitting on paper that's deeply discounted and they don't have it marked down appropriately," the trader said. "It's just been very quiet and very choppy."

FHLB plans two-years

FHLB plans to price $3 billion of new two-year Global Notes on Wednesday, talked at a tightened spread of 17 basis points over Treasuries, market sources said.

Price talk was initially set at 18 bps over Treasuries but tightened later in the day.

Citigroup Global Markets, Morgan Stanley and UBS Securities are the lead managers, with BNP Paribas Securities as the senior co-manager.

"I think the deal's going very well," the trader said. "The last I heard the books were at $3.5 billion, close to $4 billion, and they've basically shut down domestically. Heading into tonight, I'm expecting some good interest overseas. It's been a couple of months since a deal like that."

While the market had been expecting a deal, the Street was undecided in terms of which sector the agency would tap. But two-year spreads shrugged off the news.

"$3 billion is just a drop in the bucket there," the trader said.

A two-year offering by FHLB will be taking advantage of the recent tightening of spreads, which makes funding cheaper for the issuer.

"The tightening of the market since Friday obviously played into their hands, their attitude of securing better funding, and it fit their needs," the trader said. "They came at the richest area that they could, and that was a two-year."

Price talk at 18 bps over Treasuries was a concession of about 2 bps over surrounding issues, so the newer price talk offered a smaller discount for investors, the trader said. FHLB is probably not too concerned about potentially turning away some bids, however, given their history of chasing lower yields rather than deal amounts.

"At least in the last 12 months or so, they've basically stuck at $3 billion in their deal sizes and tended to oversell it," the trader said. "Having said that, sometimes people prefer bigger deals but it can work against them from a liquidity standpoint."

Uneven market tone

The market has been ambivalent over the past few days as investors try to figure out where rates and spreads are headed.

The White House's proposal for the future of Fannie Mae and Freddie Mac, which laid out three options but did not recommend one, has done little to clear the air for investors, the trader said.

"It's been a choppier market since Friday due to the [White House's paper]," the trader said. "For whatever reason...when we seem to finally find support here, you find that shorts have built up and some retailers want to sell."

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