Agencies widen as year-end selling, Treasury sell-off take toll; FHLB three-years weaken

By Kenneth Lim

Boston, Nov. 17 - Agency spreads continued to soften on Wednesday amid supply from Federal Home Loan Banks and a sell-off in Treasuries.

Bullet spreads eased out by about half a basis point across the yield curve, with volumes on the weak side amid the market volatility.

"It appeared to me as if agencies were widening yesterday on the strong Treasuries move, and they underperformed swaps as well, and that seemed to carry over to today," said Michael Skinner, an agency trader at Wall Street Access.

The market's volatility has discouraged investors from making any strong bids.

"Every day seems like a rollercoaster," Skinner said. "You hear a lot of [Federal Reserve] speakers hit the tape these days. I think we're taking it day by day. I don't know anything imminent that will change that."

FHLB sells three-years

FHLB's new 0.875% three-year Global Notes struggled on their trading debut on Wednesday, easing wider by about 1 bp.

The $3 billion deal priced at a spread of 17.5 bps over Treasuries and went out Wednesday about 18.5 bps bid, 18 bps offered.

The notes were sold at 99.82 to yield 0.934%. Price talk was at a spread of 17.5 bps over Treasuries.

Deutsche Bank, J.P. Morgan and RBC Capital Markets were the lead managers.

"The highlight of the day was certainly the Home Loan three-years," Skinner said. "The bonds came at 17.5 and they did not perform that well."

Recent front-end deals have either stayed flat or tightened the day they priced, he added.

"Typically this kind of paper gets put away or tightens a little, particularly in agencies," Skinner said.

Investors may have felt that the deal was too rich after price talk, which was set early Tuesday, was not adjusted despite widening in the sector over the past two days.

"As stuff widened yesterday, they didn't change the pricing," Skinner said.

Year-end pressure

Agencies are facing some selling pressure because of primary dealers trying to lessen their exposure going into their fiscal Nov. 30 year-end, Skinner added.

"A lot of primary dealers have their year-end on Nov. 30," he said.

The government-sponsored enterprises space also tightened for most of the previous month, so some of the selling now is simply to take profit.

"I don't see this recent widening as a precursor of things to come," Skinner said. "Obviously when Treasuries start to fall out of bed, the rest of the market gets backed up a bit."

But the market will probably recover once the year-end pressure abates, and savvy investors might be able to find some bargains in the current environment.

"I think this widening could be a bit of an opportunity as we go into the end of the year," Skinner said.

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