Agency bullets widen on profit taking, callables continue tightening; FHLB two-years flat

By Kenneth Lim

Boston, Nov. 13 - Bullet agency spreads eased slightly on Friday on profit taking after a week of compression, although callables continued to tighten amid strong issuance.

Federal Home Loan Banks' new two-year Global Notes ended the day mostly unchanged after the deal priced close to talk.

Bullet spreads were generally wider on Friday, with two-years closing flat and three- to 30-year agency paper about 1 to 2 basis points wider, an agency trader said.

"The market's just digesting the move tighter recently, and with lower yields you find it harder to sell paper," the trader said.

Demand was stronger for very short-term paper that matures in one year and under, although better value could be found farther out on the curve, the trader added.

"I think that the value is 10-years and beyond," the trader said. "There's actually good demand for MTN paper 10 years and after. I think people are looking to buy that kind of paper, but there's just not that much of those around...It's just now it's year-end, the short end is in demand and the middle of the curve doesn't offer that much value."

Callable surge

Callable issuance surged to "a little over $2 billion" on Friday, surpassing lighter sessions on Tuesday and Thursday, said Michael S. Effron, Jefferies & Co. head of U.S. government agency.

"In callables we were fairly active today in both new issuance and secondary trading," he said. "Spreads are tighter, they've continued to compress all week...$2 billion today was a pretty good day, and that even takes into account that [Federal Farm Credit Banks] didn't issue today."

He noted that funding needs out of Freddie Mac and Fannie Mae have been relatively light, while FHLB's callable issuance has been increasing slightly on selective funding needs. But supply is not a concern for callables at the moment.

"Supply isn't necessarily a problem," Effron said. "The only problem is the market's too rich."

The uptick in callable issuance was mainly because of accounts "finally starting to put a little money to work," he said.

"They're putting money to work because of the absolute low levels that they're getting for...parking their cash," Effron said. "And also the fact that they continue to see spreads tighten each day, and wondering how much it's going to go on for, and while they wait spreads continue to tighten."

FHLB closes flat

FHLB's new 1% two-year Global Notes closed mostly unchanged at a spread of about 28.5 bps after pricing at 29 bps earlier in the day.

"I think it was more swaps widened in the two-year sector today that kept it from performing," the agency trader said.

The $3 billion deal was reoffered at 99.767 to yield 1.112%. Price talk was at a spread of around 28 bps over Treasuries.

Barclays Capital, JPMorgan and UBS were the lead managers.

The trader thought that the deal did not go as well as expected.

"I thought it was cheap, but guys just didn't seem to have too much of a bid for it," the trader said.

Domestic investors received 71% of the allocations, with Asia taking 19% and Europe 1%, according to FHLB.

Investment advisers and fund managers bought 61% of the offering, while central banks took 19% and financial institutions took 7%.

Positive week

The week on the whole was a relief for agency investors on the heels of the Federal Reserve's surprise cut on Nov. 4 of its agency notes purchase program.

"I would say, given the announcement that we had last week and the move wider, we've come all the way back in, so yes, it's been constructive for agencies this week," the trader said.

"I think some of the stuff's way too rich, but I've thought that for a while now," the trader added. "I thought the Fed announcement would be an opportunity for a correction, but I was shocked by how strong the market was late last week and this week."

The week ahead will see supply possibly coming from Freddie Mac, which has a Reference Notes announcement on Monday, and Fannie Mae, which has a Benchmark Notes announcement on Wednesday.

"Freddie Mac's on Monday, but with the new deal that they had on the 4th and another one on the 30th, my expectation is they would pass or only do a $1 billion reopening," the trader said. "I'm not really sure what Fannie Mae is going to do. They could bring a new three-year, because it's their only window this month, Freddie Mac just did a two-year and Home Loan just brought a two-year."

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