Amount: $1bn designated bonds
Maturity: November 15, 2005
Issue price: 99.910
Spread at re-offer: 77bp over the UST
Launched: Wednesday October 30
Joint books: Lehman Brothers, Merrill Lynch
Lehman - The Farm Credit deal closed the day (Thursday) at 75bp and we have seen good follow-through buying from several different account types. Lehman was oversubscribed, so we were short and there were some people that did not want to get involved until it had priced.
Agency spreads did very well today (Thursday), they came in across the curve.
Merrill - The Federal Farm Credit deal was not that hard to place being only $1bn. We saw some demand from overseas - mainly central banks, but the lion's share was domestic.
FFC does not come very often and investors like it because it offers them diversification. It tends to price its deals in line with the housing agency curve, but they do not always stay in line with it.
The market is anticipating that the Fed will lower rates, so there has been a resurgence of interest in short-dated dollar product. The two year note is at 1.67%-1.68% now (Thursday), so the market is close to its lowest yet.
The speculation is now about whether the Fed will ease next week, or wait a bit. All the recent data came out weak. The market has moved so far, so fast that the major risk now is of a disappointment if the Fed does not ease.
With the hints that the Fed might lower the federal funds rate, all the agency product that was issued this week was sold very easily.
Prepayment of mortgages has slowed and that means that mortgage portfolios do not have to hedge as much, so there is not so much incentive to issue callables.
Spreads in agencies have narrowed to Treasuries and the concern about duration gaps that so dominated the market a month ago have fallen off. The fear that was in the market a month ago has dissipated.
The 10 year Fannie Mae is trading at 67bp over Treasuries, which is close to the tightest it has been this year.
Things have come in all along the yield curve, which is counterintuitive because the concern that people felt a month ago was, however exaggerated, based on something valid. People are now more focused on tomorrow's (Friday's) number.
The market is positioning itself for a weak number.