Agencies narrow as yields jump; Freddie Mac skips issuance; volatile sessions expected

By Kenneth Lim

Boston, Sept. 1 - Agency spreads tightened on Wednesday on a back-up in Treasury yields, while Freddie Mac said it would not issue any new Reference Notes this week.

"For the most part we're a little bit firmer on the day," an agency trader said. "The back-up in yields has tightened up spreads a bit, and agencies tried to follow suit."

But the market lagged swaps, which did better on Wednesday.

"Two-years were a little bit wider [versus swaps]," the trader said. "Kind of mixed in threes, and basically flat until you get way out the curve due to the steepness in Treasuries. I heard there's been some [medium-term note] buying out the curve. That's probably because some people are forced to grab some yield."

Volumes were light as the market headed into the long Labor Day weekend.

"Everyone's kind of buttoning up after going through their month-end stuff yesterday," the trader said. "There was a nice pullback in the market today, and there was definitely some buy inquiries, but I'm not going to say we did a ton or anything like that."

Freddie Mac passes

Freddie Mac did not issue any Reference Notes on its calendar opening Wednesday, the agency said in a press release.

Freddie Mac's next calendar slot is on Sept. 8.

The decision was not a surprise for investors, who had mostly been expecting a reopening if Freddie Mac did not pass.

"They have another slot next week, so it didn't surprise me," the trader said. "With all the data that's coming out, it might be a volatile next couple of days, and a lot of people are out on vacation this week."

The trader said the best demand was in the two-year sector, but the cost for Freddie Mac was not great, so the agency may have decided to wait until after the weekend in the hopes of getting better pricing.

Volatility expected ahead

Anticipation of Friday's unemployment and payrolls data is widely expected to keep the market volatile through the second half of the week.

When you're bouncing along the bottom of the yield range, you're going to get hiccups," the trader said. "The primary spot you feel this most is in callables and the mortgage market. That's where your spreads are going to widen out a little bit."

Callables in particular have come under some widening pressure during the week as yields fall.

There are "no natural buyers of volatility in this market because the big buyers have been sidelined," the trader said.

The market will nevertheless shut down early for the holiday.

"You're probably going to see volatility, particularly gamma, stay outbid in the next 36 hours until we see payrolls on Friday," the trader said. "And then you've got to remember it's a three-day weekend and there's an unofficial early close."

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