Agencies widen as investors give up recent tightening; FHLB front-end announcement eyed

By Kenneth Lim

Boston, Oct. 12 - Agency spreads widened on a quiet Tuesday as investors pushed off of recent tightening and awaited supply.

"Agencies are a little bit wider in quiet trading," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

Callable issuance was robust as Treasury yields picked up, but most of the action was focused on step-up structures.

"We saw a fair amount of callable issuance, although the bulk of it continues to be in step-ups," Hurley said.

Investors like step-ups because rates are extremely low at the moment, and those who expect yields to recover want defensive products, she explained.

"The defensive nature of the coupons stepping-up and prices in the Treasury market at the high end of the trading range just make step-ups an attractive alternative for a lot of people who are concerned about rates at some point getting higher," Hurley said.

Buyers retreat

Tuesday's widening was seen as a retraction of the previous week's strong tightening, which came amid expectations of additional monetary stimulus by the Federal Reserve.

"I think right now the Treasury market is looking at additional [quantitative easing] probably not before the November [Federal Open Market Committee] meeting at the earliest, and we've got supply, so that's causing the Treasury market to get hit," Hurley said. "Agencies are just in sympathy with Treasuries, and also, spreads seem to be at the tight end, so some widening out seems appropriate."

Another agency trader echoed the sentiment that investors were pushing back against recent tightening.

"The market's correcting itself," the trader said. "There's a good bit of supply this week, and there was probably a little bit too much excitement last week about quantitative easing, so we're seeing spreads move out a little today."

The FOMC on Tuesday released minutes from its Sept. 21 meeting. The minutes reaffirmed the market's view that the Fed could resume buying debt from the market after its Nov. 2 to Nov. 3 meeting, the trader said.

"I thought it pretty much said what we all suspected, that the Fed is worried about the economy and it's probably going to announce another QE in November," the trader said. "But that stuff's been priced in already, so there wasn't enough there to hold spreads in."

FHLB ahead

Supply will be a major theme in the week ahead. The Treasury's auction of three-year notes on Tuesday disappointed the market, setting a cautious tone for the rest of the week's auctions, the trader said.

On the agencies front, Federal Home Loan Banks has an announcement on Global Notes scheduled for Wednesday. The agency could announce a deal at the front end of the yield curve, the trader said.

"Home Loans is going to come with a two- or three-year, if at all," the trader said. "I think they could do a benchmark three-year because they haven't done that in a while. Their last one was a reopening, and they passed in August, so they do have some capacity there."

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