Agency spreads tighten as Fannie Mae skips Benchmark sale; small deals dominate callables

By Kenneth Lim

Boston, Feb. 2 - Agency spreads shifted inwards on Tuesday after Fannie Mae surprised the market by skipping an offering of Benchmark Notes that was on the issuance calendar.

Bullet spreads tightened by about 1 basis point across the yield curve with the front end strengthening a little more.

"[Two-years] were about 2 bps wider on Monday, we were about 1.5 bps tighter today," said Mark Noble, head of agency at MF Global. "It was a little bit of the same story in five-years; some people were expecting supply in the five-year sector, so spreads moved a little wider yesterday and they came in today."

Craig Ziegler, a trader at Broadpoint, said trading volumes saw a spike after Fannie Mae said early in the day that it will not issue any new Benchmark Notes.

"There was more on the front end following the news, but after that it quieted down," he said. "I would say ultimately you've seen spreads leak a little for the better part of the week."

Despite Tuesday's tightening, agencies continue to experience some weakness as investors seek better yields elsewhere, Ziegler added.

"There's still some pressure on agencies relative to new issues in supra-sovereigns," he said. "They're looking for a little more spread - not so much that they prefer supra-sovereigns - [they] just want a little more spread and yield."

Fannie Mae skips offering

Fannie Mae said it would not offer any paper on its Tuesday Benchmark Notes announcement date.

The move threw a curveball to the market, which had been expecting issuance at the front end of the curve, the traders said.

"Obviously you don't have to be a rocket scientist to figure out what happened," Noble said. "As they anticipated supply, spreads kind of moved wider to make room for it."

Investors sold in the two- and five-year sectors on Monday to make room for the additional supply that they thought was coming, and when Fannie Mae declined to add any new paper, investors quickly reversed course, he said.

Ziegler said the announcement was a "surprise" because "everyone was looking for a bit of a split issue between two years and five years."

Front-end bullet spreads had even continued to ease out just before the Fannie Mae announcement was made, following which spreads quickly turned around, he said.

"It was leaking out earlier more substantially, and then it edged in after the announcement," he said.

But Fannie Mae has another calendar announcement on Feb. 25, and the agency may just be putting off its issuance for a few more weeks.

"They have another issuance at the end of the month," Ziegler said.

Callables small but robust

Callable issuance had a fairly active day on Tuesday, but deal volumes were mostly below $100 million, the traders said.

"There were a lot of smaller deals, probably 30-plus deals, but more private deals, not real large issues," Ziegler said. "[Federal Farm Credit Banks] came with a couple of auction items...but the rest were smaller."

But in terms of dollar amounts, issuance volume was "robust," Noble noted.

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