Agency spreads tighten as Greece concerns keep volumes low; market eyes new FHLB issuance

By Kenneth Lim

Boston, Feb. 12 - Agency spreads narrowed slightly on another quiet day as uncertainty about Greece's credit strength continued to weigh on the market.

Bullet spreads closed about 0.5 basis point tighter on Friday, with shorter-term paper outperforming slightly, an agency trader said.

"On the short end, the really short end, spreads are a basis point and a half tighter," the trader said.

Callable issuance was active with short-term step-up structures dominating the pipeline.

"It's been pretty active in callable land," the trader said. "We had a lot of luck this week with a 15-year, non-call one year at 5%. We still continue to see short step-ups all across the curve."

Trading volumes remained lackluster with investors still distracted by fears of default by Greece, the trader said.

"I haven't really seen a ton of movement in spreads today," the trader said. "It's kind of a dull day. All eyes have been on Greece. All eyes have been on retail sales and some of the other numbers."

Looking ahead, investors will see potential supply from Federal Home Loan Banks on Feb. 17.

"We're expecting something on the short end, like two or three years in terms of what's coming up," the trader said.

Activity muted

The agency market tightened slightly over the week, but trading activity was extremely slow, another trader said.

"It seemed like the market was just taking a back seat and letting someone else do the driving," the trader said. The market was "very passive, very reactive."

Investors were more focused on Greece during the week as well as Treasury auctions, the trader added. The narrower spreads were welcome after a couple of weeks of widening, but compared to other asset classes agencies did not outperform, the trader said.

"Everything in the spreads markets is tighter just because the Greece situation got a little better," the trader said. "But relative to supra-sovereigns we actually underperformed a little."

Possible pickup ahead

Greece will probably continue to cast a shadow over the market until more details about a support plan by the European Union are released, the trader said. But demand for agencies is still healthy, and volumes could improve quickly once investors are more comfortable about getting back into the market.

"Agencies are facing a few issues, questions that investors are a little bit concerned about," the trader said. "There's Greece, and then there's the end of the Fed's buyback program. But those are all issues that should start to clear up very soon, and when we get there, I think you're going to see volumes pick up again."

Some additional supply could also help the market, the trader said.

"Having two weeks in a row of skipped issuance [by Fannie Mae and Freddie Mac] is a bit of a downer," the trader said. "It would be nice to get the primary market going again. It gives people something to get excited about, adds some liquidity to the market."

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