Agency spreads narrow as Greece fears rise again; Fannie Mae Benchmarks tighten on debut

By Kenneth Lim

Boston, April 15 - Agency spreads continued to tighten on Thursday on flight-to-quality trading as investors moved on weakness in the equity markets and renewed concerns about Greece.

Fannie Mae sold $4 billion of two-year Benchmark Notes to match price talk, and the new paper followed the narrowing market to end richer.

Bullet spreads contracted by about 1 basis point across the curve on Thursday, an agency trader said.

"We saw some better buying in [Federal Deposit Insurance Corp.] paper, some better selling of two-year agencies on the tights," the trader said.

Callable issuance slowed down as credit markets gained, leading yields to slip.

"Not a lot of activity," the trader said. "The market rallied. But in general the market still continues to be buyers of short lockouts, three-year maturity-and-in paper."

Fannie Mae sells two-years

Fannie Mae's new two-year 1.25% Benchmark Notes tightened by about 2 bps on Thursday to close at a spread of 23 bps over Treasuries.

The $4 billion deal arrived at a spread of 25 bps, in line with price talk. The notes sold at 99.887 to yield 1.303%.

Barclays Capital Inc., Citigroup Global Markets Inc. and UBS Securities LLC were the lead managers.

The deal impressed the market by beating off a distracting issuance by German development bank KfW, which sold $4 billion of two-year notes on Thursday.

"They did well despite some competing supply form KfW," the trader said. "I think it went well."

Fannie Mae said domestic investors took 64.6% of the notes offered, while Asian investors bought 15% and European investors bought 8%.

Fund managers formed the largest group of investors, receiving 38.5% of the issue, followed by central banks, which received 30.9%. Commercial banks bought 20.4% of the new paper.

Quality boost

Another trader said the deal, which received orders for about $5 billion, also benefited from the U.S. Treasury's strong backing of Fannie Mae and current concerns about Greece's debt burden.

"Agency paper that's three years and in at the moment is, for all practical purposes, as good as Treasuries," the second trader said. "What you've got is one piece of sovereign debt against another. Germany's a pretty good piece of credit, but maybe because of what's going on in Greece, there's a little more concern about European credit."

Concerns about Greece's credit health came up again, and prompted an influx of money into Treasuries and short-dated agencies from other debt instruments and equities, the trader said.

"Greece has been like an itch on the markets," the trader said. "It comes and goes, but it's always there and when it flares up you have to respond to it...Agencies are going to get a bit of any kind of flight to quality simply because of the Treasury support that they have."

But underlying demand for agency notes has also been strong, with or without Greece, the trader added.

"For some reason there's very, very strong demand in the market," the trader said.

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