Agency spreads unchanged as corporates steal the show; FHLB could issue in short end: trader

By Kenneth Lim

Boston, Nov. 9 - Agency spreads stayed flat on Monday as investors looked to corporates for new paper.

"The agency market today was basically unchanged," said Christopher White, senior vice president of fixed income sales and trading at Moors & Cabot Capital Markets. "I would say it was overshadowed by new corporate issuance."

White was referring specifically to Cisco Systems Inc., which sold a $5 billion three-part notes offering on Monday.

The deal comprised $500 million of five-year notes at a spread of 67 basis points over Treasuries, $2.5 billion of 10-year notes at a spread of 100 bps over Treasuries and $2 billion of 30-year notes at a spread of 130 bps over Treasuries.

Moody's Investors Service rates Cisco A1, and Standard & Poor's gives the company an A+ rating.

In agencies, two-year Fannie Mae benchmarks ended at about 21 bps over Treasuries, while three-year Federal Home Loan Banks TAPs were seen at a spread of 32 bps, White said. Five-year Fannie Mae benchmarks were offered at 32 bps.

"You've seen spreads continue to remain fairly tight," White said.

Strong demand

Agency spreads have stabilized after widening the week before on the Federal Open Market Committee's decision to cut its agency purchase program to $175 billion from $200 billion, White said. Part of the reason is that credit markets as a whole continue to draw strong interest from investors.

"Demand for credit is very, very strong right now," he said.

Treasury auctions this week in the 10-year and 30-year space will be worth watching, White added.

"The real question is the 10-year tomorrow and then the 30-year on Thursday," he said. "This will be the first auctions since the Treasury buyback program ended [on Oct. 31]."

If foreign demand continues to be strong, that should boost confidence in the credit markets, which will benefit agencies as well.

"You could see a little bit of tightening on that," White said.

FHLB on the horizon

FHLB could announce a new offering of Global Notes at the short end of the yield curve this week, an agency trader said.

"I'm expecting something at the front end," the trader said. "Actually I was just checking and they haven't come with anything more than three years this year, but then again they don't really have a reason too."

A deal by FHLB will probably do well, the trader said.

"There's still very strong demand for new agency bullets," the trader said. "All the last several Home Loan deals have done very well, and I'm sure we're going to see it again."

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