Agencies narrow as economic data lifts confidence; Fannie Mae's five-years seen as cheap

By Kenneth Lim

Boston, June 10 - Agency spreads tightened on Thursday as a rebound in confidence about the international economy raised risk appetites.

Fannie Mae's new five-year Benchmark Notes did well on their secondary market debut, narrowing versus Treasuries after the deal was seen as pricing relatively cheap to surrounding issues.

Bullet spreads closed 1 to 2 basis points closer to Treasuries across the yield curve on Thursday, an agency trader said. The market kept in line with swaps, which also improved versus Treasuries.

"We saw some very good buying," the trader said.

Callables had an active buying session, with bids coming in after the market eased off recent richness.

"Interestingly the market sold off a lot, which should really help callables, and people liked it because you can get new coupons," the trader said. "But volatility has come off, spreads have come in, and so that tightened callable spreads a lot."

The trader said Thursday's demand for callables was probably opportunistic.

"Saw a lot of callable buying, but I would say you need another sell-off before you see that again," the trader said.

Risk appetites improve

The market improved with swaps on Thursday as investors received some reassuring news about the health of the global economy.

China said Thursday that its exports rose 48.5% in May, easing fears that Europe's debt crisis could derail the world's recovery from the last recession. The U.S. Labor Department also reported that seasonally adjusted jobless claims fell by 3,000 to 456,000.

"It just seems like [investors have] kind of divorced themselves a little bit from the sort of international situations and what not, so all in all a pretty good day for agencies," the trader said.

But another agency trader said it remains to be seen whether Thursday's strength can last.

"The truth is none of these are really very important news," the trader said. "Nobody's going to remember them tomorrow. When we come in tomorrow it's going to be a clean slate, and we're going to find our way again."

The market is still smarting from the previous weeks' widening, and investors could take a cautious stance heading into the weekend, the second trader added.

"I think we're going to fall back to a middle-of-the-range kind of market tomorrow," the trader said. "People are going to think, well, what if something happens over the weekend? And they're going to hedge themselves a little."

Fannie Mae sells five-years

Fannie Mae's new 2.375% Benchmark Notes due July 2015 tightened by about 2 bps to close at a spread of 37 bps over Treasuries on Thursday after pricing at a spread of 39 bps.

The $3 billion of notes were sold at 99.704 to yield 2.437%. Price talk was at a spread of 39.5 bps over Treasuries.

Barclays Capital Inc., Deutsche Bank Securities Inc. and J.P. Morgan & Co. were the lead managers.

"That seemed to have gone pretty well," the first agency trader said.

The deal was helped by perceptions that it was cheap relative to existing paper in the sector. The trader said the concession was about 2.5 bps to an existing Freddie Mac five-year note, "which is pretty hefty."

"I think the market was sort of expecting 1 to 1.5 bps concession, but swap spreads came in and they could tighten price talk as much as they wanted," the trader said.

The trader acknowledged that Fannie Mae's decision to issue in the five-year sector may have had less to do with the attractiveness of the sector and more to do with the need to maintain liquidity. But the timing may have been as good as they could get.

"They weren't forced, but the valuations in the five-year sector have been relatively good, and they haven't done any five-years since November last year, so this is a good opportunity to get some new paper right there," the trader said.

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