Agency spreads firmer as FHLB talks two-year deal at Treasuries plus 28 bps; demand strong

By Kenneth Lim

Boston, Nov. 12 - Agency spreads tightened slightly on Thursday as Federal Home Loan Banks announced a new offering of two-year Global Notes.

"Spreads have been very well-behaved," said Doug Matthius, an agency trader at Southwest Securities. "There was a glitch a couple of days ago where the two-years went out to 27 [basis points], but they're back to 24 now."

Secondary trading volumes were extremely light coming out of the midweek Veterans Day bond market holiday.

"There's nothing going on," Matthius said. "It's very, very boring."

FHLB talks two-year deal

FHLB plans to price new two-year Global Notes on Friday, the agency said in a statement.

Price talk is at a spread of 28 bps over Treasuries and a size of $3 billion, market sources said.

Barclays Capital, JPMorgan and UBS are the lead managers.

The notes will be non-callable.

Matthius said two-year Freddie Macs were trading at a spread of around 22 to 24 bps, so price talk seemed "about right."

"I would imagine that the pot would be well-oversubscribed," Matthius said. "There just hasn't been that much supply lately."

Thomas Urano, principal at Sage Advisory Services, agreed that the price talk looked reasonable. The shape of the curve will also support demand.

"The Fannie Maes of November are 102 bps, the Fannie Maes back in July are like low 80s, and this is coming at 28 bps," Urano said. "That should provide you enough curve and rolldown potential over a quarter to get some people interested It's probably appropriate at that level."

Urano noted that the book had been filling up over the day, with about $1 billion around midday and around $2.4 billion at the 28 bps spread level just after 4 p.m.

"So they're not quite done with the whole deal," he said.

Persistent demand

Urano was not concerned that the Federal Reserve's cutback on its agency coupon purchase program, which included on-the-run agency notes, would affect demand for new issues.

"Look, the investment opportunity set has contracted to the point where a lot of investors are funneled into a few select markets," he said.

He noted that a lot of capital continues to be in agencies, and agencies still provide value for investors because Treasury yields are so low at the moment.

"If we're going to put cash in the two-year area, especially with two-year Treasuries sitting at 80 bps, and you look at agencies, that's 25 or 28 bps on top of that," Urano said. "There's certainly a role for large, liquid agency exposure in a portfolio."

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