Agency spreads widen on Treasury rally; Fannie Mae notes tighten; Trace reporting to start

By Kenneth Lim

Boston, Feb. 26 - Agency spreads widened slightly on Friday as the Treasury market rallied, although volumes were extremely thin as snowstorms in the Northeast sent many investors home early.

Fannie Mae sold $4 billion of two-year Benchmark Notes in a deal that was seen as well-received, with the new paper tightening right out of the gates.

Looking ahead, the Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine (Trace) will begin reporting real-time pricing and trade volumes of agency debt, and the market remains mixed about the effect it will have on activity.

Bullet spreads widened by about 1 basis point at the very front end of the yield curve on Friday, and by about 0.5 bp further out.

"That's because Treasuries pushed up a little more," an agency trader said.

Trading activity was quiet, muted by heavy snowfall in the Northeast.

"It's boring today," the trader said. There's "nothing going on. A ton of people have been leaving early because of the commute."

Fannie Mae narrows on debut

Fannie Mae's new 1% Benchmark Notes due April 2012 saw spreads tighten by about 1 bp on Friday after coming at an initial spread of 20 bps over Treasuries.

The $4 billion of notes was sold at 99.959 to yield 1.02%. Price talk was at a spread of 19 bps over Treasuries, market sources said.

Barclays Capital Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. were the lead managers.

The offering was well-received by the market, the trader said.

"Fannie Mae came out very well at 19.5 bps bid, 19 bps offered," the trader said. "They closed at 19 bps bid, 18.5 bps offered."

Trace reporting begins Monday

Trace will begin reporting on agency trades starting Monday, a move that was announced in September 2009 to mixed reviews.

The trader thought that the change could hit volumes initially as traders deal with the extra work.

"We've been playing with the system now for about one week, and it takes two to three times the amount of time needed to process the tickets than without it," the trader said. "You're going to slow things down."

The trader also thought that bid-ask spreads could widen initially, although over time the spread will return to normal.

"You're a trader, and a customer comes in and asks to bid $200 million of an issue that maybe has a little hair on it, like in 2008 when the automotive stuff was blowing up," the trader said. "Well, $200 million, no problem. As a trader, that's what I do, I can take a chance...but in Trace, everybody knows I have to take $200 million of risk...so as a trader you pass, and everybody passes until the whole thing is over, so it's going to take a hit on liquidity and spreads will go up."

But another trader was less pessimistic about the change, saying that Trace reporting could lower bid-ask spreads because of increased transparency.

"I think for some of the bigger, more liquid issues you could see a slight closing of the gap," the trader said. "I think overall in the long term having more transparency in the market should be a good thing, although I'm sure there are going to be some teething pains and some people will be screaming."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.