Agency spreads ease out at front end as supply looms; market watching for discord in FOMC

By Kenneth Lim

Boston, April 26 - Agency spreads closed flat to slightly wider on Monday as the market hunkered down for a week of new supply.

Bullet spreads pushed out by about 1 to 1.5 basis points in the two- to four-year sectors but stayed unchanged in five-years and longer.

"Spreads remained relatively firm at the front end...the rest of the curve felt pretty steady," an agency trader said.

Callable issuance was healthy but unexceptional, the trader added.

"Spreads held pretty constant, so demand didn't change much," the trader said. "Most people were managing their inventories in the three-years and shorter buckets."

Supply ahead

The supply picture is at the top of most investors' minds in the week ahead, the trader said.

On Thursday, Fannie Mae is expected to announce whether it will issue Benchmark Notes as part of a calendar offering.

The trader expects the agency to launch an offering of three- or five-year notes, although demand for two-year paper is very strong at the moment.

"There's a lot of demand in two-years," the trader said. "But from a Libor funding basis, I think they're going to do a three- or five-year."

The Treasury will also sell $118 billion of two-year, five-year and seven-year Treasury notes from Tuesday to Thursday. The government also sold $11 billion of five-year Treasury Inflation-Protected Securities on Monday.

"That's going to affect a lot of things, a lot of trading," the trader said. "People are concerned about how it's going to affect rates."

If rates go up and the U.S. dollar holds firm, the agency market should see an increase in buying interest, the trader said.

"That is a good possibility," the trader said. "We've been pushing that 3.75%-ish level on 10-years for a few days now."

FOMC meetings worth watching

Investors this week will also be watching for signs of disagreement among members of the Federal Open Market Committee when it meets Tuesday and Thursday.

"Since there doesn't seem to be much going on this week, the marketplace is going to look for any dissension between members," the trader said.

Agency spreads and prices could be affected by signs that voting members could be turning more aggressive on the Fed's rates policy, or in the treatment of the central bank's agency debt and mortgage-backed securities holdings.

"That's what everybody's going to be focusing on," the trader said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.