Agencies tighten on bargain hunting, but volumes thin; FHLB reopens two-year Global Notes

By Kenneth Lim

Boston, May 12 - Agency spreads tightened on Wednesday as bargain hunters continued to support the market, while a small reopening by Federal Home Loan Banks paper eased supply concerns.

Bullet spreads closed the day mostly narrower by about 2 to 3 basis points across the yield curve, while discount notes enjoyed strong demand, an agency trader said. Two-year agency notes ended about 2 bps tighter, three-years shifted in by 4 bps, while five-year paper was narrower by about 3 bps.

Versus Treasuries and swaps, the agency market outperformed.

But three-year spreads were slightly skewed because of rolling-on trades.

"We had the roll into the new three-years, so optically they tightened about 4 bps in the three-year sector," the trader said. "Roll-adjusted, [it was] maybe 2 bps tighter."

Callable issuance was also active, but actual trading volumes were light.

"There's definitely a sense of better buying in agencies, but at the same time, because of the volatility, a lot of the business in callables has quieted down because spreads have tightened in and volatility has dropped," the trader said.

FHLB reopens two-years

FHLB on Wednesday sold $1 billion of reopened 1.125% two-year Global Notes to yield 1.038% through an auction.

The notes sold at 100.172961, with a bid-to-cover ratio of 3.9 times.

There are now $4 billion of notes under the series.

The two-year paper priced slightly cheap relative to surrounding issues, the trader said.

"I had a buyer of that issue yesterday that bought it at 18 bps over," the trader said. "Today they issued at 17.5 bps over. They were basically 18 bps, 17 bps in the market before that, then 18.5 bps, 17.5 bps on the follow. Now they're going out at basically 18.5 bps, 17.5 bps."

Rate-based market

The front-end agency market has been behaving more like a rates market than a spread market, the trader said.

"We've kind of taken on some of the characteristics of the Treasury market," the trader said. It's "more of a rate-type market than spreads. Spreads are so tight to Treasuries...when twos were back to 1% obviously there was much stronger buying."

That helps to explain why agency trading volumes have been so low. Because absolute yields have been so low, investors have been reluctant to put their money to work through agencies, the trader said. But the market has loosened up a little this week.

"The backup in Libor has loosened things a little bit," the trader said. "We have seen huge demand in the discount notes arena in the past couple of days."

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