A primary dealer is seeing a pick up in demand for short agencies based on the constant-maturing Treasury. But the Federal Home Loan Banks have stopped issuing such debt, leading to $200 million of requests for the bond going unfilled, according to an agency marketer at a New York-based primary dealer.
A range of middle-market banks, brokers and state counties have requested the FHLBs to issue one- to two-year agency floaters through the bank, the marketer said. The two-year agency floaters tend to trade at 25-32 basis points tighter than the two-year CMT, she noted. Demand may have increased now due to the positive carry advantages of owning the bond versus LIBOR-based floaters, she conjectured.
The pick up in demand is reminiscent of March, when the primary dealer did $800 million in 10 trading days. This is a significant amount considering the dealer had received almost no requests for the bonds before February and the minimum size for these deals is $10 million, the marketer noted. Year to date, this dealer had done only about $1.5 billion in the bonds.
The marketer speculated the FHLBs are not issuing the CMT-based floaters due to accounting issues some of the member banks are experiencing. David Messerly, FHLBs' spokesman, declined comment on if the halt in issuance was related to the accounting investigations and declined to speculate when the agency might reissue the bonds.
