Agencies narrow with swaps as Europe fears ease; Fannie Mae plans to sell two-year notes

By Kenneth Lim

Boston, Jan. 12 - Agency spreads followed swap spreads slightly tighter on Wednesday following a successful bond sale by Portugal.

Fannie Mae announced an offering of two-year Benchmark Notes, getting strong demand from the marketplace on a slow trading day.

Bullet spreads closed slightly narrower versus Treasuries across the yield curve on Wednesday, an agency trader said. The three-year spread held up well against the roll.

"The three-year roll was 5 basis points," the trader said. "It was 22 bps over yesterday and today it's 17 bps over. The three-year usually comes under a little bit of pressure, so it held up quite well."

Trading volumes remained thin amid a massive snowstorm in the Northeast and distracting supply in Treasuries and corporates.

"We haven't started the year yet, unfortunately," said Mike Goldman, head of agency trading at Guggenheim Partners. "It definitely feels like there's a better tone in the market, just not a lot of activity yet."

The callable market was more active after interest rates rose on Tuesday.

"I think with the tradeoff yesterday some new coupons got printed, and investors were a little bit low on inventory."

Fannie Mae plans two-years

As was widely expected, Fannie Mae announced Wednesday that it plans to sell new two-year Benchmark Notes.

Price talk was set at 22 bps over Treasuries, market sources said.

In a break from the norm, the timing of the deal was not set at the time of the announcement, although the settlement date was set for Jan. 18, a day after the Martin Luther King Jr. Day holiday. Market sources said the deal was expected to price Thursday.

The ambiguity about the timing may have been a cautious response to Wednesday's snowstorm in the Northeast, one trader said.

"It may be the snow," the trader said.

Another trader said price talk was 1 bp cheap versus comparable issues and "kind of makes sense."

"Talk is around Libor minus 7 bps, and from what I hear the books are in excellent shape," the trader said.

Swaps pull tighter

Swap spreads finally found some relief on Wednesday, and agencies benefited.

Portugal sold €599 million of 10-year bonds on Wednesday to yield 6.716%, a cheaper financing than the previous auction in November. The successful offering eased concerns that the country's high debt levels may force it to seek a bailout.

Wider swap spreads at the start of the week dragged agency spreads out versus Treasuries, and agencies naturally followed the market tighter when the reverse happened.

"Generally the product on the day tried to keep pace with swaps," a trader said. "We're tracking swaps pretty well."

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