Agency spreads narrow on Greece lifeline; Fannie May two-year deal possible, trader says

By Kenneth Lim

Boston, April 12 - Agency spreads narrowed slightly on Monday after a lifeline by euro zone countries to Greece eased concerns about the country's debt burden.

Risk premium on bullets tightened by about 1 to 2 basis points across the curve, said Michael Skinner, an agency trader at Wall Street Access.

Note noted "low volumes" but said "anything we have seen has been tightening."

Trading volumes in general were light coming out of the weekend.

"It was a very, very quiet day," Skinner said. "That's probably true of all financial markets, particularly so in agency land today."

Even callable issuance was slow.

"Callables were quiet," Skinner said. "Callables have been good this year, but they've been coming since April started. Volatility is coming down, and that takes off some of the allure of the call options."

Greece, economy lend support

News that E.U. countries had agreed to provide a $40.5 billion loan to Greece, with the International Monetary Fund offering an option for another $13.5 billion, helped to ease fears about the debt-laden Mediterranean country and tighten spreads, Skinner said.

"With Greece appearing to get a bailout here, volatility has come off, and when volatility comes off you're going to see spreads do a little better."

Growing optimism about the domestic economy also has been helping to pull spreads inwards.

"Before the weekend we saw a lot of bullish writings about the economy...that's been supportive of spreads here as well," Skinner said.

Fannie Mae on horizon

The rest of the week will see investors focused on Fannie Mae's Wednesday announcement on a possible issue of Benchmark Notes.

Skinner expects the agency to announce an offering of two-year notes. He acknowledged that many investors in the market would like a five-year deal because no new five-years have been printed in weeks, but he did not think Fannie Mae would launch a deal in that part of the curve.

"I'd love to see it, but based on where they can get the best levels, they've been doing it in two- and three-years," he said.

Developments on the Greece issue could continue to be a factor, simply because "we've been going on Greece headlines for a few weeks, but the next couple of weeks could be good for spreads, Skinner said.

"What's interesting is there's no Treasury auction coming on the next two weeks, which has been rare," he said. "That's probably good for all fixed income markets. What happens when there's Treasury supply is some of the money has to come out from other types of fixed income products, so if there's no supply that should give some support to spreads."

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