Agency spreads end unchanged as Fannie Mae to announce supply; front-end deal expected

By Kenneth Lim

Boston, Aug. 2 - Agency spreads closed flat on Monday as investors kept on the sidelines ahead of possible supply from Fannie Mae.

Bullet spreads ended unchanged across the yield curve, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

"Agencies are pretty much unchanged across the board," she said.

Callable issuance was decent, but volumes were weaker compared to the bumper harvest of previous weeks, Hurley said.

"We're definitely still seeing callable issuance, but the volumes that we are seeing currently, compared to about a week or two weeks ago, is a fraction of what we were seeing earlier," she said.

Trading activity in general was typically quiet for a Monday in the middle of summer.

"It's very, very quiet," Hurley said.

Fannie Mae ahead

Fannie Mae could announce an offering of Benchmark Notes at the front end of the curve on Tuesday, traders said.

Hurley said she had heard speculation about a five-year offering from Fannie Mae.

"I'm not hearing of the size, but you know, Fannie Mae has been coming with large sizes so I'm guessing it should at least be a couple of billion," she said.

Another agency trader thought that a two- or three-year offering was more likely.

"They just did a five-year in June, so I'm not sure if they really have much of a need in five-years," the trader said. "I would expect a two-year or three-year."

The market had not set up for any supply Monday.

"Not yet. Probably tomorrow after they announce," the trader said.

Market hungry for supply

A sizable deal from Fannie Mae would be extremely welcome by the market, the trader said.

"Everyone's been saying it for weeks," the trader said. "We need supply. We need supply for liquidity; we need supply for a healthy price correction."

The agency market is trading at historically low yields and relatively tight spreads, the trader said. While some of that richness has had to do with a shift toward fixed-income safe havens in the past couple of months, a significant reason for the expensive valuations is that benchmark supply has slowed to a trickle.

"I think that's the biggest reason of all," the trader said. "The [government-sponsored enterprises] don't have any real funding needs, but at the same time investors want more of these agency bonds that offer better returns than Treasuries. So there's an imbalance right now, and prices and spreads are very rich."

But the trader was prepared for the supply drought to continue.

"Freddie Mac passed last week, and everyone thought they would come with something," the trader said. "Do I think Fannie Mae could pass tomorrow? Sure."

© 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.