Agencies inch narrower with swaps; Fannie Mae's $6 billion deal highlights active primary

By Kenneth Lim

Boston, July 8 - Agency spreads closed mostly unchanged on a quiet Thursday as the market tracked swaps a tad tighter.

Fannie Mae's new $6 billion of three-year Benchmark Notes was the highlight of the day, surprising many with the size of the deal.

"Spreads were generally unchanged to slightly tighter," an agency trader said. "I'd say they probably tracked swaps, because swaps are tighter."

Secondary trading volumes in general were light amid a lack of significant news and typical summer slowness.

"It was fairly quiet, just based on typical flows," the trader said.

Primary torrent

The primary market was much more active on Thursday, with 41 new issues on the trader's screen.

"A lot of new issues came to market today, primarily step ups," the trader said. "There's been a large amount of paper that has been called over the last couple of months, and step-ups are very defensive."

Mark Noble, head of agency at MF Global, said reinvestment of money that was previously in callables has been driving the furious pace of callable issuance. It is also the root of the slow secondary scene for callables.

"Secondary flow has been a little lighter than primary issuance...because people are just sitting there and waiting to get called," Noble said.

Fannie Mae sells three-years

Fannie Mae surprised the market by selling $6 billion of new 1.25% three-year Benchmark Notes on Thursday at a spread of 23.5 basis points over Treasuries.

The notes were sold at 99.979 to yield 1.257%. Price talk was at a spread of 23.5 bps over Treasuries.

Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC were the lead managers.

The new paper traded mostly flat throughout the day, ending at spreads of about 23 bps bid, 22.5 bps offered.

"$6 billion is a good-sized deal," Noble said. "The interesting part I guess was the breakdown, and the distribution."

Fannie Mae said central banks took 55.2% of the offering, which is an unusually large proportion. Fund managers bought 35.2% of the deal, and commercial banks just 4%. Domestic investors remained the biggest bloc at 41.9%, while Asian accounts received 27.6% of the notes offered.

A government bond trader said investors were expecting the deal to be smaller.

"There was KfW yesterday, so the market wasn't expecting that they [Fannie Mae] would be able to sell so much," the trader said. "I guess a lot of that upsize came from the central banks, which when you think about it didn't affect spreads as much because they usually hold them for a little longer. Good deal."

Fannie Mae's ability to sell that much paper after KfW Bankengruppe's $5 billion three-year offering reflects the strong demand for front end agency debt at the moment, the trader said.

"Investors have been waiting for new paper for two weeks, and they finally got it today," the trader said.

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