Agencies, swaps narrower, but low yields keep volumes thin; Fannie Mae five-years unlikely

By Kenneth Lim

Boston, April 13 - Agency spreads followed swaps tighter on Tuesday, but volumes languished as investors found the market too rich.

Fannie Mae could announce an offering of two- or three-year Benchmark Notes on its Wednesday calendar opening.

Bullet spreads came in about 1 basis point across the curve, but lagged swap spreads, which narrowed by about 1.5 bps across the yield curve, said Mike Goldman, head of agency trading at Guggenheim Partners.

"When swaps move in a lot, even if agencies don't want to come in, they'll still come in kicking and screaming," he said. "That's what happened today. Swaps did very well today, so agencies also did well."

The market saw more activity in callables, Goldman added.

"Callables are still being issued," he said. "We had a pretty big day in secondary callables...You've got the steep yield curve and people keep buying."

Richness dampens volumes

Tuesday's spread tightening pushed agency valuations ever richer compared to Treasuries, Goldman said.

"Rich to Treasuries, absolutely, but cheaper to swaps, so it's a tough call," he said. "I think more customers look at agencies to Treasuries than to swaps, but these tight swaps are extremely tight."

If agencies are tightening because of higher Treasury rates, rate buyers looking for absolute yields can often provide support and keep volumes healthy, Goldman said. But Treasury rates have not climbed much this week due to a lack of supply in the coming weeks.

"You usually get some rates-based buying," he said. "When spreads tightened enough, sometimes you had people coming in saying, 'I'm not worried about the tight spreads because we got the yields,'...But now we've bounced back from the [Treasury] auctions last week, so we don't have the high rates.

"You have tight spreads without attractive yields," Goldman said.

Fannie Mae announcement ahead

Fannie Mae will probably announce a two- or three-year offering of Benchmark Notes on Wednesday, Goldman said. The size of a deal would probably be around $3 billion to $4 billion.

"Most people expect the front end," he said.

The agencies have not launched benchmark-sized offerings of new notes since January, so a five-year issue by Fannie was possible, although Goldman did not think such a scenario was likely.

"I wouldn't rule it out," he said. "It's been quite a while since they did a new one...But I just don't think that's going to happen because of funding levels."

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