Agency spreads end flat after Spain downgrade, FOMC meeting; Fannie Mae expected to pass

By Kenneth Lim

Boston, April 28 - Agency spreads clawed their way back in to end unchanged on Wednesday after a tumultuous session.

Bullet spreads widened slightly early in the day as concerns about the debt burdens of Greece and Portugal continued to weigh on the market, said Michael Skinner, an agency trader at Wall Street Access.

But investors drew comfort from the Federal Reserve's Federal Open Market Committee meeting statement in the afternoon, which left unchanged the central bank's language on interest rate policies.

Callable issuance opened strong but trickled off later in the day.

"A lot of underwriters came in this morning...because new issue callables can be written for cheaper because volatility was up," Skinner said. "We saw an early rush to issue some callable paper, but that being said, after the FOMC statement, volatility has traded off a little."

Volumes were muted despite a roller-coaster day for spreads.

"I can't say I saw a terrible amount of trading," he said. "But definitely spreads were moving quite a bit."

Turbulent market

Standard & Poor's downgrading of Spain's credit rating to AA fro AA+ on Wednesday led to some widening early Wednesday, Skinner said.

The downgrade came just a day after S&P also downgraded Greece and Portugal's sovereign credit ratings.

"They downgraded Spain, and the kneejerk reaction was to go a little bit wide from there," he said.

Investors were concerned about spillover consequences if a rescue package for Greece is not announced soon, Skinner said.

"Here's the fear: It goes back to when we started, in this country, where at first it was Bear Stearns and then people thought it was over with, but then it was a contagion that spread,' Skinner said. "The underlying fear is that if this Greek package doesn't get done soon, it could spread over there the same way things were spreading here."

Fed offers comfort

But the market quickly recovered in the afternoon, when the FOMC said it would leave short-term interest rates at the current low for an extended period.

"The FOMC statement came out at around 2 o'clock, and they said things are going to remain as they are for a while," Skinner said. "That put the market at ease, so the curve steepened a touch, agencies tightened a touch. So after all the news, we're right back to where we started."

Investors now look ahead to Fannie Mae's scheduled announcement on Benchmark Notes issuance on Thursday, but expectations for a big issuance are slim, Skinner said. Thursday's announcement will be the second calendar slot this month for Fannie Mae.

"My guess is that they'll pass," he said. "I don't think they have the need right now."

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