Agencies quiet as Treasuries retreat on supply; Fannie Mae finds appetite three-year notes

By Kenneth Lim

Boston, May 12 - Agency spreads closed flat on Thursday as Treasuries slumped and Fannie Mae added $4 billion of supply at the front end of the yield curve.

Bullet spreads ended the day unchanged versus Treasuries, a government bond trader said. Yields, however, rose as Treasuries slipped on the back of a poor auction of 30-year bonds.

"Agencies didn't really do much today other than Fannie Mae this morning," the trader said. "There were some bids on the back-up in yields, but not that much."

The callable market had a "fairly lackluster" session, said Wall Street Access trader Michael Skinner.

"Some callable stuff was printed, but [I'm] not sure how much stuff was sold," he said.

Low coupon levels are giving potential buyers pause before picking up new callable paper, Skinner said, but that effect is probably only temporary.

Investors could be betting that yields will improve after the current round of quantitative easing ends at the end of June. Existing callable notes have also been redeemed at a brisk pace as rates stick to historic lows.

"At some point I think that money's going to be put back in the market," Skinner said.

The market's relatively muted level of activity on Thursday may also have been related to a large gathering of industry players in Memphis, Skinner said.

"It's a big party and a lot of people are over there," he said.

Fannie Mae sees good demand

Fannie Mae saw strong demand for its $4 billion offering of three-year Benchmark Notes.

The 1.125% notes priced at a spread of 20.5 basis points over Treasuries, traded as tight as 20 bps and went out at about 20.5 bps offered, 20 bps bid, Skinner said.

"It was a decent size and good demand domestically," he said.

The notes were sold at 99.86 to yield 1.171%. Price talk was at a spread of 20 bps over Treasuries.

Barclays Capital Inc., Goldman Sachs & Co. and J.P. Morgan & Co. are the lead managers of the offering.

U.S. investors took 57.8% of the notes offered, followed by Asian accounts with 16.7%, according to data released by Fannie Mae.

Fund managers formed the largest bloc of buyers, with 46.3% of the offering, followed by central banks, which took 40.1%. Commercial banks played a relatively small role in the deal, taking only 2.8% of the allocations.

The government bond trader said the deal got good demand during marketing, and price talk was widened to accommodate the market's cheapening on Wednesday.

"It sold well, which is no surprise because we hardly get any supply these days," the trader said. "They probably could have sold $5 billion, but they probably capped it at $4 billion just because they just don't have that kind of funding requirement."

Inflation data ahead

Investors were watching for Friday's consumer price index and consumer sentiment index to paint a better picture of inflation and the pace of economic recovery, the trader said.

"We had a mixed number today from jobless claims," the trader said. "Tomorrow you have the CPI and consumer sentiment. They're not usually major data points like non-farm payrolls, but they're essential pieces of the puzzle we're all trying to figure out on the Street."

But activity on Friday will probably remain muted, the trader said.

"Barring some unforeseen event, I think it's going to be another slow day," the trader said. "We might get a bit of a pick-up next week as guys try to get things done before the summer, but we're beginning to see the start of the summer slowdown."

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