Agency spreads tighten on bargain hunting; FHLB plans $3 billion of three-year Global Notes

By Kenneth Lim

Boston, March 17 - Agency spreads narrowed across the board on Tuesday as bargain hunters supported the front end, while Federal Home Loan Banks announced a benchmark-sized deal in the two-year sector.

Bullet spreads closed about 1 to 2 bps tighter against Treasuries across the yield curve. But the move was seen as lagging swaps.

"We saw a five-year bullet today at plus 32 bps, so spreads are tighter," said Christopher White, senior vice president of sales and trading at Moors & Cabot Capital Markets. "But swap spreads are in...so we continue to see a contraction in swaps spreads. I think agencies today underperformed swaps."

Trading volumes were good, especially in the morning, White said.

"Yesterday it was active in the morning on the agency front, we saw some people getting involved before the [Federal Open Market Committee meeting statement]," he said. "This morning again we saw a fair amount of banks and money managers coming in and buying a little bit of risk in agencies."

More straight step-ups

Callable issuance was still robust, although White noted a drift away from one-time call step-up structures.

"A lot of the structures [a few weeks ago] were one-year, one-time calls," he said. "Now I'm seeing more people doing just straight step-ups with no one-time calls."

White said investors were buying slightly longer paper as an extension trade from the six-month and one-year parts of the curve out to the two-year and three-year sectors.

"It's all about the curve," White said.

The willingness to go a little further out is also informed by the Fed's announcement on Tuesday that it remained committed to keeping rates at the current low for "an extended period," White said.

FHLB to price three-years

FHLB plans to price $3 billion of new two-year Global Notes on Thursday, with price talk at an initial spread of 22 basis points over Treasuries, market sources said.

BNP Paribas, Barclays Capital and Deutsche Bank are the lead managers of the offering.

The deal comes with a concession of about 2 to 3 bps from surrounding issues, an agency trader said.

"It looks like it's attractively priced," the trader said.

The announcement in the two-year sector was not a surprise given the recent richening in that part of the curve, but some softening could be expected on the additional supply.

"I think there's going to be good demand for this," the trader said. "But that money's going to come from somewhere, and I think you're going to see some widening in the surrounding issues. I think the market's ready for a bit of widening at the front end, and this could give them an excuse."

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