Agencies widen as rates succumb to late sell-off; Freddie Mac passes on calendar issuance

By Kenneth Lim

Boston, Dec. 15 - Agency spreads continued to widen Wednesday as investors sold fixed income assets on persistent inflation concerns.

Bullet spreads closed 0.5 to 1.5 basis points wider versus Treasuries on Wednesday, with five-year and longer paper faring worse. Yields followed Treasuries higher as the Empire State business conditions index jumped in December, raising inflation fears.

"We saw a bit of tightening early in the day with Treasuries rallying, but there was a sell-off in the afternoon, and on the whole things were better to sell," a trader said.

Trading volumes were light, and the lack of liquidity added to the market's volatility.

"We're not seeing much in terms of two-way flow, and it's actually quiet given all that volatility that we're seeing, so it's very, very choppy," the trader said.

Callable issuance was also light despite the higher rates, which would usually attract more demand as investors try to capture the higher coupons.

"There's a lot of extension risk, and on the issuance side there's really not much to do," another trader said.

Agencies show resilience

The agency market's performance on Wednesday was decent despite the slight widening, the second trader said.

"Spreads are actually holding in pretty well," the trader said. "Spreads are wider, but they're not as wide as swaps; so, versus swaps we're tightening a little bit."

Some support may have come indirectly from Freddie Mac, which said in a calendar announcement Wednesday that it would not issue any Reference Notes this week.

Freddie Mac's next calendar slot in on Jan. 4.

"Freddie Mac passed on issuance today, so that relieved some of the supply concerns," the trader said.

The agency's decision to pass on issuance was not a surprise for the market, with the year-end already drying up liquidity and after Freddie Mac sold sizable deals in its previous offerings.

"We weren't surprised, but it's always good to see the headline," the trader said.

Tough week ahead

Agencies should continue to see volatility heading into the end of the year, following the lead of Treasuries, the first trader said.

"We're kind of at the mercy of those bigger forces," the trader said. "The market's really more concerned about Treasuries right now. Once that market calms down, then we'll see a little bit more interest in the rest of the spread markets. But that's not going to happen until next year when volumes get back to normal."

The primary market for agencies is also as good as done for the year, the trader added.

"There was still a chance today for something from Freddie Mac, but they passed, and I don't think Fannie Mae's going to do anything next week," the trader said, referring to Fannie Mae's calendar announcement slated for Dec. 20. "New supply's basically been the main driver of activity for us, and if there's nothing for the rest of the year, there's not going to be a lot of trading."

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