Agencies widen with swaps as yen intervention, Fed meeting weigh on market; TVA launches

By Kenneth Lim

Boston, Sept. 16 - Agency spreads widened on Thursday under the shadow of weaker swaps and uncertainty surrounding the central banks' actions in the markets.

Bullet spreads closed about half a basis point farther out from Treasuries on Thursday, with the longer end of the yield curve underperforming for the second straight day on the back of the Bank of Japan's intervention to devalue the yen.

"For the most part agencies were under a little bit of pressure, as were swaps," an agency trader said.

Callable issuance remained robust, fueled by reinvestment of older paper getting called amid the low interest-rate environment.

"A lot of deals got done today," the trader said.

TVA launches deal

Tennessee Valley Authority marketed a new offering of 50-year Power Bonds, talked at a spread of 77 basis points over Treasuries, market sources said.

The size of the offering had not been set, but it was expected to be benchmark size, which is at least $500 million.

Bank of America and Morgan Stanley are the lead managers, market sources said.

The deal's long maturity was unusual for the market in general, although Tennessee Valley Authority has issued such long paper before, the trader said.

"They've got some longer paper out there, some 2056 paper, some 2039 paper, so they do tend to come more frequently than Fannie Mae or Freddie Mac out in that sector," the trader said.

There was some talk in the morning that the deal's launch may have put some pressure on the long end of the yield curve.

"It could have affected the longer end of the curve," the trader said. "I was not really involved out there, but I would anticipate that there may have been a bit of widening. You could have seen some hedging ahead of pricing."

Central banks in focus

The markets continued to be affected by volatility surrounding the Bank of Japan's yen intervention and potential quantitative easing by the Federal Reserve.

"There's a building uncertainty about what the Fed will announce next week in terms of another round of quantitative easing," the trader said. "And this Japanese intervention in Treasuries is affecting our yields in general."

Japan's central bank began to buy the U.S. dollar and sell the yen on Tuesday, putting steepening pressure on yield curves on expectations that the intervention will focus on front-end Treasuries. At the same time, longer-dated yields rose as investors shifted toward shorter maturities.

The markets have also been speculating about whether the Fed will decide next week to expand its purchasing of Treasuries in order to keep interest rates low.

The result of those forces has been a volatile week for rates and wariness in spreads.

"There's been a bit of widening in our spread markets," the trader said.

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