Agencies widen slightly; Fannie Mae sees strong demand for three-, five-year offerings

By Kenneth Lim

Boston, Oct. 28 - Agency spreads eased out slightly on Thursday as Treasuries staged a rally, but new issues from Fannie Mae saw solid demand.

Bullet spreads were about half a basis point wider across the yield curve as Treasuries rose on bargain hunting and a strong auction of seven-year notes.

Trading volumes were brisk with the Treasury auctions out of the way and some month-end activity, although callables remain stuck in a slump.

"A lot of guys, with the recent back-up, have printed some structures that have had better coupons," said Michael Skinner, an agency trader at Wall Street Access. "But from what I've seen, demand has been pretty spotty."

Fannie Mae sells notes

Fannie Mae saw strong demand for both its Benchmark Notes offerings on Thursday.

The $1 billion reopening of 1.625% Benchmark Notes due October 2015 priced at 100.618 to yield 1.496% through an auction.

Pricing represented a spread of about 23.5 basis points over Treasuries, about half a basis point through the offer side. At the close, the five-years were trading at a spread of around 24.5 bps bid, 24 bps offered.

"Demand has been pretty strong," Skinner said. "At the end of the day, there are only so many Aaa names out there."

The current outstanding principal amount on the note series is $5.5 billion.

Fannie Mae also priced an $8 billion offering of 0.75% three-year Benchmark Notes on Thursday at a spread of 19.5 bps over Treasuries.

The notes priced at 99.957 to yield 0.764%. Price talk was at a spread of 20 bps over Treasuries.

Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. and J.P. Morgan & Co. were the lead managers.

The three-year notes tightened over the day, going out at a spread of about 19 bps bid, 18.5 bps offered.

"A deal that size, you'd think it might leak, but it actually did very well," Skinner said.

Rush for bullets

The three-year offering was seen as relatively cheap to the sector during price talk, which helped demand. There may have also been a bit of a rush for what could potentially be the last major bullet issuance for the year, Skinner said.

"You have the elections coming up," Skinner said. "If the Republicans grab control of Congress, which they've been trying to do for a long time, they're trying to change the way Fannie Mae and Freddie Mac operate, so it's an area of gray in terms of what they may be able to do after the elections."

The government-sponsored enterprises could also turn to cheaper sources of funding as the year draws to a close.

"These guys are getting very good funding from discount notes and their [medium-term notes] programs," Skinner said.

The recent back-up in rates and the approaching month-end could have sent some investors scurrying for bullets as well.

"Certain guys have their indexing needs," Skinner said.

Employment, Fed on the radar

Friday's market could see a modest pickup in activity on month-end volumes.

"Tomorrow is the last trading day of this month," Skinner said. "Whatever they didn't finish today they'll do tomorrow."

Beyond that, investors have their sights set on the Federal Open Market Committee meeting on Nov. 2 to Nov. 3 and the employment situation report on Nov. 5. Uncertainty surrounding those events could keep some money out of sight.

"Typically before employment numbers, investors keep it pretty close to the vest," Skinner said.

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