Agency spreads follow swaps narrower; FHLB's new two-year Global Notes close unchanged

By Kenneth Lim

Boston, June 17 - Agency spreads tightened slightly on Thursday after a rocky session, getting support from stronger swaps despite some weakness in the afternoon.

Federal Home Loan Banks sold $3 billion of new two-year Global Notes, which ended the day mostly unchanged from pricing.

Bullet spreads closed about 1 basis point narrower across the yield curve on Thursday, said Craig Ziegler, an agency trader at Gleacher & Co.

"Everything was better bid today," he said. "We loosened up a little in the afternoon as swaps widened out a little bit, but for most of the day we followed swaps tighter."

Another trader said callables had a robust session, mostly dominated by issuance of new step-up structures.

There's "good demand in step-ups," the trader said. "It's a good structure to have when you think rates are going to be low for a long time, and lately the market seems to think rates aren't going to change for a while."

Volumes remained weak.

"We saw a bit of action when Home Loans priced, but other than that it's been really quiet," the trader said. "Tomorrow's going to be even worse."

Midday volatility

Swaps spreads were the key driver behind Thursday's agency market, the trader said.

Better confidence about Europe's debt crisis pulled swaps tighter on Thursday after Spain successfully sold €3.5 billion of debt. Germany, France and Spain also put their weight behind releasing results of "stress tests" on banks, which could shed some light on the health of the continent's lenders.

But weaker economic data on the domestic front, in the form of higher jobless claims and a slowdown in manufacturing growth, led to some weakness in the middle of the day.

It was "kind of an up-and-down day," the trader said. "[The day] started out O.K. right out of the gates, then we sort of widened out a little, and now we're ending about flat to maybe a touch tighter across the curve."

FHLB sells two-years

FHLB wrapped up a solid $3 billion sale of new 0.875% two-year Global Notes on Thursday.

The notes priced at a spread of 22.5 bps over Treasuries and closed at a bid spread of about 23 bps and an offer spread of 22 bps.

The notes were sold at 99.871 to yield 0.935%.

Price talk was initially set at 26 bps over Treasuries before being tightened to 24 bps late Wednesday.

Credit Suisse, Deutsche Bank and UBS Securities were the lead managers.

"It was a pretty good deal," the trader said. "They tightened it up near the end, but that was mostly because the rest of the market was tightening in the morning. Good demand all around. They didn't really tighten much after they priced, but again, that was mostly because of the market."

The trader said the deal offered a slight concession of about 1 bp versus surrounding issues.

"That's about average for a two-year," the trader said.

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