Agency spreads stay put on wary Monday; investors await Treasury, Freddie Mac new supply

By Kenneth Lim

Boston, Feb. 8 - Agency spreads closed flat on Monday as investors mostly stayed on the sidelines amid uncertainty in the credit markets.

"Spreads are unchanged to 1 basis point one way or the other across the board," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

The market was noticeably quiet as concerns about the credit strength of a few European countries continued to weigh on credit investors. Trading volumes were extremely thin, Riley added.

"It's a really, really quiet day," he said.

Even callable issuance, which has mostly remained robust despite ups and downs in bullet trading, slowed down to a crawl on Monday, Riley said.

"It's off significantly," he said. "We're not seeing nearly as many issues as even a month ago. It's certainly not because of the reluctance of the issuers, which all want to issue more, with the exception maybe of [Federal Farm Credit Banks]. There's just no demand."

Another agency trader said investors were "just walking off inventory that they wrote last week."

But given the recent widening in corporate spreads and a Treasury rally, agency spreads have held better than expected, the trader said. Agency spreads did not narrow over the past week, but they did not widen much either.

"There's been more buying rather than selling," the trader said. "I would normally expect, given the widening in corporates, I'd expect us to widen 3 to 5 bps."

Freddie Mac could eye front end

Freddie Mac could announce an offering of two- to three-year Reference Notes on Wednesday as part of its issuance calendar, both traders said.

"Freddie Mac is scheduled to announce something on Wednesday," Riley said. "They threw everybody a curveball the last round when they reopened the five-year; everybody was expecting a three-year. But this time I think it's going to be a two- or three-year, the size at least $1 billion or $1.5 billion."

The other trader also expects a three-year offering based on Libor spreads.

Treasury auctions in spotlight

Investors will look to the week's Treasury auctions for guidance, the traders said.

The Treasury will sell $81 billion of three- and 10-year notes and 30-year bonds from Tuesday to Thursday. The offerings come after strong auctions of two-, five- and seven-year Treasury notes the previous week.

"There's a lot of supply coming out of the Treasury," Riley said. "The market's obviously going to be driven by Treasury supply and how well the auctions go...The last series of auctions went extremely well and I would expect extremely good demand for 10s and 30s."

The other trader doubted that this week's Treasury auctions would be as good as the previous set. For a start, 30-year Treasury yields have been falling, which could reduce demand for the longer-end paper. Auctions on the longer end of the curve in general also do not draw as much attention, the trader said.

"I was surprised with the strength of the previous auctions," the trader said. "The last one was twos, fives and sevens; this one is threes, 10s and 30s. These usually don't go as well as the others."

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