Agency spreads narrow as bargain hunters emerge; FHLB could launch two- or three-year deal

By Kenneth Lim

Boston, May 11 - Agency spreads closed slightly tighter at the front end of the yield curve on Tuesday as buyers took advantage of recent widening.

Bullet spreads nudged narrower on Tuesday, outperforming both Treasuries and swaps.

"Spreads today were slightly better and outperformed swaps quite a bit because swaps were wider at the end of the day," said Mark Noble, head of agency at MF Global.

Callable issuance also picked up as investors bought on a rebound in volatility.

"Callable issuance was a little bit more active than what we saw on Monday," Noble said. "[There were] a lot of reopenings of existing deals and guys getting out of deals that they printed at higher yield rates."

The agency market enjoyed an increase in activity and buying, Noble said.

"I think that the tone was better volume, better activity from accounts," he said.

Mixed performance

But Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said Tuesday was an uneven session for agencies.

"We're seeing a mixed performance with the front-end doing well and the back-end underperforming a little," he said.

He pointed out that agency spreads have actually widened the past couple of days, and the market has not caught up with Treasuries.

"The truth is the Treasury markets are liquid and quick to transact, so agencies haven't benefited as much from the flight to safety," LeBas said.

Agencies also do not stand to fully benefit when investors move out of Treasuries and into riskier products, LeBas added.

"The agency sector is not a favorite of the high beta crowd," he said. "It's not necessarily in a bad way...it just means a little less transaction volume when things get volatile."

FHLB offering ahead

Federal Home Loan Banks could announce an issuance in the two- or three-year sectors on Wednesday, Noble said. A deal would be the first big bullet offering in a fortnight after Freddie Mac passed on its calendar slot a week ago.

"We've got a new issuance tomorrow from Home Loans," he said. "It will be important to see if they come up with something."

Noble said a five-year deal was unlikely based on funding levels.

"Libor valuations are attractive, from an issuer's perspective, from the three-year and two-year sectors," he said. "If they do issue, we could see them go out with a reopening of the three-year or a small new issue in twos or threes."

© 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.