Agencies ease on front end, tighten at long end; Fannie Mae offers two-, five-year notes

By Kenneth Lim

Boston, Aug. 3 - Agency spreads closed mixed on Tuesday as the front end of the yield curve underperformed on larger-than-expected supply from Fannie Mae.

Bullet spreads widened in the two- to five-year sectors on the back of Fannie Mae supply, while spreads tightened slightly in the seven- to 30-year sectors.

"Further out on the curve we saw good demand in the seven- to 20-year sectors," an agency trader said. "One reason is yield grab. The second reason is that part of the curve looks a little cheap to Libor, and guys are trying to play the roll-down trade."

Callables also saw brisk business as reinvestment of called paper continued to drive that segment of the market.

"I just had a client ask for a two-year, non-call six months, flat to bullets," the trader said. "He preferred to own that than agency bullets because he thought it's going to get called in six months. He's playing the roll-down trade as well."

Trading volumes in general were a marked improvement from a quiet Monday.

"It seems that Tuesdays, Wednesdays and Thursdays are when the markets really get going," the trader said. "Mondays and Fridays you can just stay at home."

Fannie Mae brings supply

Fannie Mae surprised investors by adding more-than-expected supply through a reopening of five-year notes and an offering of new three-year paper.

The agency priced a $1 billion reopening of 2.375% five-year Benchmark Notes to yield 1.759% through an auction Tuesday. The notes priced at 102.925.

The size of the debt series is now $4 billion after the reopening.

The spread on the five-year notes was about 20.5 bps over five-year Treasuries at pricing. The notes ended the day at a spread of 21 bps bid, 20.5 bps offered.

Fannie Mae also plans to price new three-year Benchmark Notes on Wednesday, talked at a spread of 24 bps over Treasuries, market sources said.

The size of the deal has not been set, but at least $3 billion of notes are expected to be offered.

Banc of America Securities, J.P. Morgan & Co. and UBS Securities LLC are the lead managers.

"It will go well because there's been no supply," the trader said. "That part of the curve is richest, which is why they came at that part of the curve, but there's been selling there and the new issue will look better than surrounding issues."

Supply brings relief

Despite the widening at the front end of the curve, investors seemed to welcome the cheapening of the market, the trader said.

Two-year spreads were as tight as 9 bps last week and have since eased to 13 bps as the supply arrived, the trader said. Three-year on-the-run spreads have kept steady at about 18 to 19 bps, while five-year spreads have shifted out to about 21 bps from 17 bps.

But further out on the curve, seven-years and 10-years have come in by about 3 bps, while 30-year spreads are narrower by 2 bps.

"I think the buyers never went away," the trader said, adding that the widening at the front end may be enough to attract more buying. "Considering that we never seem to see any widening and there's huge demand for product, I was selling eight- or nine-month paper today at 32 bps, which was barely 5 bps over carry."

© 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.