Agency spreads narrow on swap inversion; FHLB richens talk on $3 billion Global Notes

By Kenneth Lim

Boston, April 6 - Agency spreads tightened slightly on Tuesday amid a sharp narrowing in 10-year swaps, while Federal Home Loan Banks saw a strong response for a planned offering of three-year Global Notes.

Bullet spreads closed about 1 to 2 basis points tighter across the yield curve on Tuesday, according to data from Tradeweb.

"The agency curve has steepened a little," a trader said. "Two-year sector spreads have tightened a little bit, and there's definitely some buying on the pullback in rates. We're seeing rates-based yield buying."

But agencies underperformed swaps, which saw another inversion in 10-year swap spreads.

"Ten-year swaps have gone negative again, and people are trying to figure out what's going on," the trader said.

Trading activity, however, remained light, with volumes only about two-thirds of the six-month average, the trader said.

The Federal Open Market Committee released minutes from its March meeting on Tuesday, and the market continued to read a sense of caution from the central bank, the trader said.

"The Fed is obviously still cautious, although there is kind of a tug of war," the trader said. "You've got one Fed equation saying [inflation] is subdued, and there's no reason to hurry and raise rates, while others are saying the housing market is artificially subduing inflation and there's definitely pressure out there...it's just something we can't answer right now."

Swaps go negative

Swaps made a sharp move inwards on Tuesday, with 10-year swap spreads down to about 2 bps below Treasuries and yields down by about 7 to 8 bps, the trader said. The tightening marked the second time in as many weeks that 10-year swap spreads have inverted, and agencies have not been able to keep up.

"We've been vastly underperforming swaps in the last couple of weeks," the trader said.

Strong corporate and municipal issuance are partly responsible for the richening in swaps, while some rate investors are also trading in swaps instead of just in Treasuries at the moment, the trader said.

"There's a certain element of rate players expressing their views in swaps rather than Treasuries," the trader said.

FHLB tightens offering

FHLB tightened price talk on its $3 billion offering of three-year Global Notes on Tuesday to about 30 bps over Treasuries, the trader said.

Initial price talk was at 32 bps over Treasuries. Pricing is set for Wednesday.

Banc of America, Citigroup and UBS Securities are the lead managers.

The deal, which is the first benchmark-sized bullet offering in two weeks, saw strong demand from the market, and the order book closed at close to $5 billion, the trader said.

"It was well over-subscribed," the trader said.

The latest price talk implied a concession of about 1 to 2 bps to surrounding issues, the trader said.

"Earlier it was roughly 2 to 3 bps concession, and agency paper has tightened, but not quite that much in that sector," the trader said.

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