Fannie Mae has already issued subordinated debt. Its 6.25% February 2011 paper is currently trading at 107bp over the benchmark 5% February 2011 Treasury, which equates to 12.3bp through mid-swaps. The bond has been trading at a constant 20bp-22bp premium to 10 year senior debt, but lost ground against swaps last week in line with the rest of the 10 year sector.
Though most bullet agency bonds continued to cheapen against swaps last week, the 10 year sector is now reaching historical lows. One would have to look back as far as May 1999 to find the last time 10 year agency paper was this cheap against swaps.
Some bankers were last week attributing the cheapening to movements in the swap curve as an interest rate rally brings money into asset swaps. The agency spread to Libor curve, meanwhile, continues to steepen. Even if the agency curve does not rally, these levels represent an opportunity to buy longer dated agency bullet paper - 30 years and particularly 10 years.
Supply, meanwhile, remains heavy. Freddie Mac priced $10bn of Reference Notes in one day last week, while Fannie Mae priced $11.5bn the week before. Student loan agency Sallie Mae came back to the market with a $1bn five year deal.
Fannie Mae is due to announce the mandates and details for its 10 year Benchmark and either a two or a three year on Friday. The deals will be priced the following Thursday, March 22. Short dated agency supply is expected to remain heavy in order to refinance callable debt. Falling interest rates have meant that the agencies have called $135bn since the beginning of March.