Agencies narrow at long end on light trading, yield-seeking; Freddie Mac could skip sale

By Kenneth Lim

Boston, Aug. 30 - Agency spreads tightened slightly at the longer end of the yield curve Monday on the back of light month-end window dressing.

Spreads closed about 1 basis point narrower in five-years and longer paper, while spreads in shorter issues ended mostly unchanged.

"We did see a little bit of buying today on higher yields," said Mike Goldman, head of agency trading at Guggenheim Partners. "Of course, they were hoping to buy on last week's yields."

Callable issuance was slower than normal on the combination of Monday's lower absolute yields and a summer slowdown, another trader said.

The second trader added that market activity in general was slower on Monday.

"There was hardly anything going on today," the trader said. "I don't expect it to get any better the rest of this week."

Flattening curve

The trader said there has been more activity at the longer end of the curve with low yields and tight spreads limiting the liquidity of shorter maturities.

"The new Fannie Mae [0.625%] two-years, for example, they're trading around 0.66% in terms of yield," the trader said. "There's really not a lot of allowance in terms of yield. A move of 1 basis point out of 66 bps means more than the same absolute move farther out where the yield is maybe 1.625% for the five-year Fannie Mae."

But the trader cautioned against reading too much into Monday's movements.

"Volumes were really low today," the trader said. "I don't know if you can look at the spreads now and say you're getting a good handle on the market."

Goldman added that the front end was already so rich that it was hard for buyers to find value there.

"There's no yield left at the front end," he said.

Freddie Mac ahead

The market could get some supply this week if Freddie Mac utilizes its calendar slot on Wednesday.

The trader said the market has not formed a firm opinion on what the agency will do, but it was possible that Freddie Mac will pass this week.

"The market's kind of operating at half speed this week, plus you have payrolls on Friday kind of keeping some people on the sidelines, so it might not be the best time to try to sell a new issue," the trader said. "They have another announcement next week, so they could easily wait one week and hope for better pricing."

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