Agency spreads wider at long end on overseas selling; Fannie Mae deal expected Wednesday

By Kenneth Lim

Boston, Oct. 2 - Agency spreads ended slightly wider on the long end of the yield curve Friday, although investors remained distracted by the Treasury markets.

"We widened a little in longer maturities," an agency trader said. "[We] saw some selling from overseas accounts."

The Freddie Mac 2.125% Reference Notes due Sept. 21, 2012, which were reopened on Sept. 24, continued to lag the market, the trader said.

"You had continued lag in the three-year Freddie Macs, which they reopened last week for $1 billion...so there's some value there," the trader added.

The agency market in general also saw some weakness because of FDIC-guaranteed note offerings by Citigroup Inc. and General Electric Co. earlier in the week. Citigroup sold $5 billion of two- to three-year FDIC-guaranteed notes, while GE priced $3.5 billion of FDIC-guaranteed notes due 2012, all on Tuesday.

"We saw some selling versus the FDIC deals that priced," the trader said. "We have some accounts buying that."

Steeper curve

The agency yield curve has steepened slightly, the trader said.

"In general on the week we have outperformed," the trader said. "We've seen pretty good buying especially at the front of the curve, especially versus swaps. I have heard, but I have not seen myself, but I heard there has been some selling at the belly of the curve and longer. We just kind of followed the tone of the market all week."

Agencies were again the follower on Friday as the Treasury market saw widespread selling after disappointing unemployment figures were released.

"It felt a lot like buy on rumors, sell on the fact," the trader said of the Treasury selloff. "We saw a big amount of buying yesterday, which had some people scratching their heads. I heard from somebody at a much bigger shop that people were trying to figure out where the [Thursday] rally was coming from."

The U.S. Labor Department on Friday said 263,000 jobs were cut in September, while unemployment rose to 9.8%.

Fannie Mae on the horizon

The week ahead will see Fannie Mae announcing on Wednesday whether it will issue Benchmark Notes.

But the trader did not expect a major offering from the agency.

"I hate to sound like a broken record, but if they don't pass, it's likely to be a small deal at the front of the curve or a reopening," the trader said. "But lately they've been passing on everything or just coming with small $1 billion deals."

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