Agency spreads flat amid Greece concerns, jobs data; Fannie Mae offers two-, five-years

By Kenneth Lim

Boston, Feb. 25 - Agency spreads ended mostly flat on Thursday as the market easily absorbed two offerings by Fannie Mae, although volumes continued to be lackluster.

"Today was kind of a non-event," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial. "The market just marched in place. Spreads didn't really move one way or the other."

Volumes remained thin, and investors appeared to be in two minds about where the market is heading, Riley added.

"There's still some discussion about the Fed vis a vis the [government-sponsored enterprises] and whether they're going to fold it under the federal balance sheet etcetera," he said. "I've got some insurance companies and funds saying they don't want to touch agencies until all of this is resolved, and I've got some investors saying nothing's going to happen...it's the kind of times we're living in."

Another trader said the market took a break from the tightening that had gone on for most of the week as new concerns about Greece's ability to take on additional debt surfaced on Thursday.

"I think there was a bit of concern in the markets today," the trader said. "There's talk about Greece coming to the market next week, and they might have trouble finding buyers. On the domestic front I think the unemployment claims numbers were weaker than expected, so overall spread markets didn't do as well today."

Fannie Mae adds supply

Fannie Mae announced two offerings on Thursday, a $1 billion reopening of its 2.625% notes due November 2014 and a benchmark-sized offering of two-year Benchmark Notes.

The reopened Benchmark Notes closed unchanged after being priced at 100.671 to yield 2.473% through an auction, Riley said.

After the reopening, there is now $5.5 billion outstanding of the notes.

The market easily took the additional supply in stride, Riley said.

"It was kind of expected," he said. "I had guys saying they were expecting a two-year; some said they were expecting a five-year. They came with both."

Having what could be an additional $4 billion at least of notes entering the market in two days did not place much pressure on spreads, Riley said. But he did not think that the market's appetite was endless.

"The market's had this unbelievable ability to take supply," he said. "Look at Treasury auctions. We literally have supply every week now...But I think at some point in time you've got to look at the amount of supply that's out there. You don't just look at agency supply, you look at all supply, because when you get right down to it it's all the same thing now."

Fannie Mae talks two-years

Fannie Mae also plans to price a benchmark-sized offering of new two-year Benchmark Notes on Friday with price talk at a spread of 19 basis points over Treasuries, market sources said.

The exact deal amount has not been set.

Barclays Capital Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. are the lead managers.

The agency trader said the Fannie Mae deal offered only a slight concession to existing two-year notes but will probably do well on Friday.

"It's been weeks since we've had a benchmark two-year, and investors are all hungry for supply," the trader said. "They didn't really have to give a very big concession."

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