Agencies ease slightly on new wave of fear; FFCB deal tightens on debut after strong offering

By Kenneth Lim

Boston, May 20 - Agency spreads held firm on Thursday to withstand a crushing day for equity markets despite a bit of early weakness.

Federal Farm Credit Banks concluded a solid sale of three-year notes, which tightened after hitting the secondary market.

Bullet spreads eased a touch at the start of the day following Wednesday's tightening, but a resurgence of fear related to the European debt crisis helped spreads to remain mostly flat to slightly wider on the day. Seven-year spreads closed 1 basis point tighter, while elsewhere on the yield curve spreads ended unchanged or 1 bp wider.

"Spreads were wider initially in the morning by about 2 to 3 bps," an agency trader said.

"But when the stock market turned around, especially in the afternoon, spreads came ripping back in, from 1 wider to 1 tighter in the seven-year sector. And stocks have been so low since then that spreads were doing nothing the rest of the day."

Trading volumes were about 50% lower than usual because of the volatility in the markets.

"Treasury volumes are pretty high right now, but other than that volumes in spread products are very low," the trader said.

Callable issuance was also low on Thursday.

"Callables were very quiet today," the trader said. "Not a lot of new issuance. There was some buying of the new issuance balance from maybe around a week or two ago, but other than that it was quiet. There was good buying of floaters in the morning."

Unusual firmness

The trader said the market was puzzlingly calm in light of the equity market's steep drop. The seven-year's reversal into tighter territory, especially, was "remarkable."

"Corporates were getting hammered, but swaps and agencies didn't do much," the trader said. "Maybe people were hedged up already. I thought we'd get hammered today."

Part of the tightness was due to a lack of sellers.

"Normally in this kind of environment, you'd expect spreads to get trashed," the trader said. "But there were just no sellers. It's holding remarkably well. I sold a lot of it this morning, but I had to buy a lot of it back because it didn't widen. It seems like guys are not as worried about liabilities in Treasuries or the agency market."

Investors could also be reluctant to make any moves because of confusion over the real extent of the debt crisis in Europe that has been fuelling the current market discomfort.

"I think a lot of guys don't really trust what's going on right now."

Even if sellers can be found, buyers of agency debt are also a rarity these days.

"We need higher yields to get buyers in, but if we can't widen today, we're not going to widen tomorrow," the trader said.

FFCB sells well

FFCB's new three-year 1.375% Designated Bonds tightened about 2 bps to a spread of 29 bps bid after pricing at a spread of 31 bps.

The $1 billion offering was initially talked at 27 bps over Treasuries, but that was pushed out to 30 bps late Wednesday.

The notes sold at 99.688 to yield 1.479%.

Bank of America Securities LLC, J.P. Morgan Securities Inc. and UBS Securities LLC were the lead managers.

The trader said the deal drew a strong response from the market and it was "well oversubscribed."

The relatively small size of the offering helped to boost perceived demand, while Fannie Mae's three-year offering, which priced Wednesday, softened the sector.

"The three-year sector had been beaten pretty bad because of the new Fannie Maes, so the bond looked cheap, and it was cheap anyway against supra-sovereigns," the trader said. "And it's a $1 billion deal. You never get the amount that you'd want on a $1 billion deal."

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