Agencies narrow amid pressure from currency interventions; Fannie Mae prices $8 billion

By Kenneth Lim

Singapore, Oct. 6 - Agency spreads tightened slightly on Wednesday as investors continued to seek out U.S. dollar-denominated assets following Japan's currency intervention.

The strong demand also helped Fannie Mae to push out a strong offering of new two-year Benchmark Notes.

Bullet spreads closed mostly narrower against both Treasuries and swaps on Wednesday.

"We're basically 1 to 2 basis points tighter," an agency trader said.

Buyers were active on the long end of the yield curve, hoping to pick up some returns as rising prices depressed yields across the curve.

"There's been some resistance in the current yield environment," the trader said. "You know, we're talking 0.51% on a two-year agency, so we've seen some interest in moving further out the curve to pick up some more yield."

The same dynamic was seen in the callable sector.

"We saw a lot of buying out the curve today in long callable agencies," the trader said. "Some large 4% deals got printed out in the 20-year sector, and all of it was snapped up."

Fannie Mae sells two-years

Fannie Mae's new 0.5% Benchmark Notes due October 2012 tightened by about 1.5 bps to end at a bid spread of 11.5 bps over Treasuries.

The notes priced at a spread of 13 bps over Treasuries early Wednesday, tighter than price talk of 14 bps over Treasuries.

The $8 billion deal priced at 99.965 to yield 0.517%.

Barclays Capital Inc., J.P. Morgan & Co. and UBS Securities LLC were the lead managers.

"I think there was big overseas interest," the trader said.

The size of the deal may have surprised some in the market, which was nevertheless expecting a strong deal.

"The fact that it came that strong was a little bit of a surprise," the trader said. "Although I will qualify that by saying that in hindsight, at 0.5% it was a sweet spot for central banks. Two-years is a sweet spot for the central banks...whenever you have strong central bank participation the deals tend to do well."

Central banks bought 49.4% of the notes offered, according to data from Fannie Mae. Fund managers bought 45.9% of the offering, while state and local governments took 2%. Commercial banks bought just 1% of the notes offered.

Domestic investors took 47.5% of the offering, followed by Asian investors with 36.1%. European investors received 1.1% of the notes offered, with the remaining 15.3% going to investors from other countries.

Currency impact eyed

The Fannie Mae deal and the agency market in general benefited from the Bank of Japan's ongoing intervention to devalue the yen.

"There's a lot of this currency intervention going on, and some of that found its way into the Fannie Mae deal," the trader said.

That strong demand has helped agencies to outperform both Treasuries and swaps.

"We've richened a little bit versus swaps," the trader said. "Deals were coming slightly negative on a swap basis a couple of weeks ago, and we're now in negative territory versus swaps. You can see the evidence in the two- to three-year sector. Today's deal came at minus 5 to minus 6 to swaps. It's just a continuation of the yield compression."

Looking ahead, investors will be closely monitoring the jobless claims and employment situation figures as the week draws to a close.

"We are pretty much focused on employment at this point," the trader said.

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