Agencies mixed as positive payrolls hit fixed-income markets; Fannie Mae sells two-years

By Kenneth Lim

Boston, Nov. 5 - Agency spreads closed mixed on Friday as fixed-income markets reacted negatively to better-than-expected payrolls data.

Fannie Mae sold $7.5 billion of new two-year Benchmark Notes amid solid demand. The new paper tightened over the day.

Bullet spreads narrowed slightly at the front end of the yield curve, while five-year and longer maturities widened a tad against Treasuries. On the whole, the agency market outperformed Treasuries and swaps.

"We've seen a fairly impressive performance for the agency curve," said Michael Skinner, an agency trader at Wall Street Access. "We've outperformed swaps."

Callable activity remained slow, as it has been all week. Skinner said dealers are still dealing with a glut in inventories, which accounts for the slower-than-usual pace of issuance.

"It's got all the hallmarks of a very quiet Friday," he said.

Fannie Mae sells two-years

Fannie Mae saw solid demand for its offering of 0.375% two-year Benchmark Notes, selling $7.5 billion at a spread of 10.5 basis points over Treasuries.

The notes priced at 99.837 to yield 0.452%. Price talk was at a spread of 10.5 bps over Treasuries.

Barclays Capital Inc., Deutsche Bank Securities Inc. and UBS Securities LLC were the lead managers.

Price talk offered little to no concession over surrounding paper, Skinner said. Historically, the typical concession of new issues has been about 2 to 3 bps, although recent issues at the front end have been more aggressively priced at a concession of about 0.5 bp.

"I thought it was priced a little tight at 10.5 bps over," Skinner said. "But it came in 0.5 bp over the day, so it went pretty well. The fact is there's only so much Aaa benchmark paper out there...People are gobbling up the new issues."

The deal itself, as well as its size, was a bit of a surprise to the market because Fannie Mae had already issued $8 billion of three-year notes and $1 billion of reopened five-year notes the week before, and the agency was not believed to have great funding needs.

"I was surprised to see another $7.5 billion in benchmark size in the two-year sector," Skinner said. "But I guess it came at 10.5 bps over, now it's 10 bps bid, so obviously there was demand."

Payrolls better than expected

The Labor Department on Friday said non-farm payrolls rose a better-than-expected 151,000 in October, although unemployment stayed flat at 9.6%.

The payroll numbers put pressure on fixed-income assets across the board, but the longer end of the yield curve was particularly vulnerable. The consolation for agency investors is that the market has held up relatively well against Treasuries.

The lack of supply at the long end of the agency yield curve is a major reason for the resilience in the 20-year and longer sectors, Skinner said. The agencies have not issued any new benchmark bullets in the long end of the curve since the financial crisis struck, and the longest agency paper at the moment matures in just 22 years.

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