Agency spreads widen as investors hold back; Freddie Mac likely to use calendar slot

By Kenneth Lim

Boston, May 24 - Agency spreads eased out slightly on a slow Monday as a lack of clarity about the week ahead and the creeping summer doldrums kept trading volumes light.

Bullet spreads closed a touch wider across the yield curve, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"We kind of drifted all day...nothing to get excited about one way or the other," he said.

Trading volumes were extremely light, Riley added.

"We had very, very few agency orders," he said. "I think one of my traders put it very nicely. He said we should go to a three-day week, because there's nothing on Mondays and Fridays."

Another agency trader said the market was also waiting to gauge market demand in Treasury auctions later in the week before taking positions.

"I think the sentiment right now is let's just sit tight and see what happens with the auctions and with Europe before we do anything," the trader said. "There's been so much volatility and uncertainty the past three weeks; nobody wants to be the first to stick his neck out."

Europe on the mind

Europe remains a top concern coming out of the weekend, with news that Spain seized control of CajaSur bank.

"Wait, haven't we put the financial crisis behind us?" the trader said. "You mean we're not out of the woods yet? I don't know what to think, honestly. There's a lot of soul searching, so to speak, a lot of that going on right now. People trying to figure out how big of a problem this Europe thing really is. Is it going to send us into a double dip?"

Riley said agency spreads have been slowly creeping outwards as the uncertainty weighs on the market.

"We're back from early last week's levels," he said. "We've been drifting back and back, and I think that's more of a case of money pouring into the market as a safe haven than anything else. Large blocks of money want to hide in a crisis situation, and they go straight to Treasuries, which causes a widening of spreads. That's mostly what's been going on, so we are slightly wider."

Freddie Mac supply expected

The market expects Freddie Mac to add to supply later in the week with a calendar announcement on Wednesday.

Riley said he had heard speculation about a three-year offering of Reference Notes.

"That seems to be popular right now," he said, referring to the previous week's three-year deals by Fannie Mae and Federal Farm Credit Banks.

The other trader said Freddie Mac will probably announce a deal after skipping on a calendar slot earlier in the month.

"They skipped at the start of the month, and their next one's not until June 24, which is a whole month later, so I would expect them to come out with something, something in the front end," the trader said.

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