Agencies widen on supply, looming CPI data; FHLB up on debut, FFCB plans 3.5-year deal

By Kenneth Lim

Boston, April 14 - Agency spreads widened slightly on Thursday on an uptick in supply and nervousness about Friday's consumer price index data.

The primary market had a busy session as Federal Home Loan Banks and Federal Farm Credit Banks brought deals in the front end of the yield curve.

Bullet spreads closed about half to 1 basis point wider across the curve, an agency trader said.

"It was new issue day in bullets today," the trader said. "Away from that there was a little bit of pressure on spreads...ahead of tomorrow's CPI. Some guys are taking money out to wait out the numbers."

The secondary callable market had another active session, helped by rich valuations of new issues. New callable step-ups were hovering around Libor minus 30 bps about 10 days ago but have steadily richened to about Libor minus 20 to 24 bps currently, the trader said.

"[There was] a lot of buying in the secondary market for callables, so a lot of people's inventories are cleaning up here," the trader said. "By next week it looks like most paper underwritten over the last month should be gone, so even though new issues are extremely rich right now we might see a wave of new issues."

FHLB tightens on debut

FHLB's new 1.375% Global Notes due 2014 tightened by about half a basis point on Thursday to close at a spread of 18.5 bps over Treasuries.

The $3 billion deal arrived at a spread of 19 bps over Treasuries. The notes were sold at 99.867 to yield 1.419%. Price talk was at a spread of 18.5 bps over Treasuries.

Barclays Capital Inc., Goldman Sachs & Co. and J.P. Morgan Securities LLC were the lead managers.

"I expected it to tighten a little bit more than that, so I am a little disappointed," the trader said.

The trader said the deal was priced around 8 bps below Libor, which was "rich, but not crazy rich."

Given the relatively small size of the offering and the fact that FHLB did not increase the size of the deal despite strong demand, the new paper should have tightened more, the trader said. But the announcement of the new deal by FFCB, which was around the same sector of the yield curve, could have dampened the market's reception.

"Maybe the announcement of the Farm Credit deal put some pressure," the trader said.

FFCB plans deal

FFCB plans to price 3.5-year Designated Bonds on Friday, talked at a spread of 43 bps over Treasuries, market sources said.

The size of the deal has not been determined, but it is expected to be about $1 billion.

J.P. Morgan Securities LLC, Morgan Stanley & Co. Inc. and UBS Securities LLC are the lead managers.

The deal will probably do well because FFCB is a solid issuer and does not come out with bullet deals often, the trader said.

"It's going to be a small deal," the trader said. "Farm Credit deals always trade like gold."

The size of the deal will also probably stay around $1 billion, if only because FFCB can actually get cheaper funding from the callable market, the trader said.

"They're just doing this deal to give us dealers a little something back," the trader said.

FFCB's deal will come in what could turn out to be a volatile session for the market, the trader said, referring to Friday's CPI numbers.

"We've got a big number tomorrow," the trader said. "I think it should be relatively volatile...If it's a weak print, rates should rally."

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