Agencies flat as TLGP deals steal the show; large Fed front-end buy could signal profit-taking

By Kenneth Lim

Boston, Oct. 28 - Bullet agency spreads stayed put on Wednesday as federally guaranteed offerings stole most of the limelight.

The Federal Reserve Bank of New York also provided support at the front end of the yield curve with a sizable outright coupon purchase operation, although one analyst thought it could signal profit-taking sentiments.

Bullet spreads closed mostly flat across the yield curve on Wednesday, said Southwest Securities agency trader Doug Matthius.

"Ten-year bullets were unchanged," he said. "It's a very, very slow day. Everything outside of FDICs are relatively unchanged."

Volumes were extremely thin, despite bond markets "grinding up all day," Matthius said.

"Just a very slow day," he said. "At these levels and the volatility of the market, at least for our firm, our clients have very short arms right now. They can't reach deep into their pockets."

The fixed-income markets are also experiencing a sense of richness.

"When the market backs up, we see people getting their toes in the water," Matthius said. "But once we got past 3.50% in the 10-years [Treasury], it seemed like all the buying stopped."

TLGP paper rises up

Most of the action on Wednesday was focused on new issues that were backed by federal temporary liquidity guarantee programs.

Western Corporate Federal Credit Union sold $1.5 billion of 1.75% three-year notes backed by the National Credit Union Administration on Wednesday at 35.9 basis points over Treasuries, Matthius said.

The deal was done under the Temporary Corporate Credit Union Liquidity Guarantee Program.

Bank of America Merrill Lynch was bookrunner.

The multi-state credit union is based in Manhattan Beach, Calif.

GMAC LLC also priced $2.9 billion of 1.75% notes due 2012 backed by the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. The GMAC notes were priced at a spread of about 31.5 bps over Treasuries.

The offerings led the TLGP space to widen by about 3 to 4 bps, Matthius said.

"FDIC-guaranteed paper widened on the news that there was more issuance coming," he said.

Opportunistic investors have leapt on the weakness in those sectors, he added.

"We just had a client looking for the cheapest FDIC offerings because spreads have widened out there," he said.

Fed buys at short end

The Fed on Wednesday bought $5.358 billion of two- to four-year agency notes from the market as part of its outright agency coupon purchase program.

That amount was 42.5% of the $12.608 billion of notes offered, a similar percentage to its most recent operations.

George Goncalves, chief fixed income rates strategist at Cantor Fitzgerald, observed that the amounts in the latest Fed action was almost $2 billion more than average and $3 billion more than the last time it targeted the same sectors.

"What is even more impressive is that investors tendered in $12.6 billion," he wrote in a note. "A record amount of tenders."

The amount that the Fed bought is probably dictated by the amount of notes that they were offered, Goncalves wrote, which makes the amount tendered the big takeaway from the operation.

Goncalves believes that investors are beginning to take profit from the agency market's tight spreads, offering as evidence the "chunky" amounts in certain targeted note series.

"If this trend continues perhaps we are at the beginning of the spread profit taking season for agency bonds which have seen [their] spreads collapse to pre-Lehman levels," he wrote.

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