Agency spreads end flat on quiet Monday; FHLB could launch three-year deal Tuesday

By Kenneth Lim

Boston, April 5 - Agency spreads closed mostly flat on Monday as cautious investors appeared to lay low in wait for events later in the week.

Federal Home Loan Banks could announce an offering in the three-year region on Tuesday, while minutes from the March Federal Open Market Committee meeting and Treasury supply are keeping the market on its toes.

Bullet spreads seemed to end mixed on Monday after a lackluster session.

"Spreads are slightly tighter, but there's very little trading," said Mark Noble, head of agency at MF Global.

Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co., said spreads seemed "pretty much unchanged to a basis point wider."

The callable market showed a little more life because of the recent rise in rates, with 10-year yields hitting 4%, Noble said.

"There's a little bit of action in callables due to the continued sell-off in rates," he said.

Hurley agreed that investors were moving on the ability to capture better yields.

"A lot of callable issuance today," she said. "A lot of step-up issuance today, and I'm hearing that a good portion - not all of it, but a good portion - is getting done just because of the higher yields."

Home Loans announcement ahead

FHLB could launch an offering of three-year Global Notes on Tuesday in a calendar announcement, Noble said.

"All eyes are on tomorrow's Home Loan Banks," he said. "The only probability seems to be a three-year issue, or maybe a reopening of another issue."

Noble did not expect a large offering coming out of FHLB because Libor spreads have tightened dramatically in past weeks.

"Libor valuation is still a little skewed...They're a Libor-based funder," he said. "With the current Libor valuations they're probably not [looking to] issue a lot of debt here. They'll probably use callables to meet their funding needs."

Wary investors

Investors appeared to be cautious on Monday in anticipation of a number of events later in the week, which led to weak trading volumes, Hurley said.

"We have a lot of supply upcoming this week," she said. "We did have the [Treasury Inflation-Protected Securities] today, which did go very well, but the bulk comes Tuesday, Wednesday and Thursday with the threes, 10s and 30s. People want to see how that's going to go."

Investors are also waiting for more economic data "to get a better idea of how the economy is doing," while minutes from the FOMC's March meeting could offer clues on the Fed's direction in the months ahead.

"Tomorrow's FOMC minutes from the March meeting will be important," Hurley said.

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