Agencies flat as buyers keep market in line with Treasuries; Fannie Mae announcement ahead

By Kenneth Lim

Boston, Sept. 22 - Agency spreads remained flat on Wednesday as investors kept the market in line with rallying Treasuries.

Bullet spreads closed the day unchanged, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"Pretty good flow today," he said. "Most of the action was in that five- to seven-year sector of the curve, which we currently view as the cheapest part of the curve right now."

Callable issuance remained robust on the back of reinvestments as issuers call old paper as soon as possible to take advantage of the current low rates. But Riley said actual issuance beyond that was low.

"Callable issuance continues to plug along because everything gets written on the first call date," Riley said. "Everything's getting called."

Treasury-driven rally

Buyers were aggressive on Wednesday on the back of confidence about rates following the Federal Reserve's statement the day before that said inflation was well below target levels.

"There are very positive signals for the supply scenario, so we continue to march forward," Riley said.

Agency spreads have not moved much as Treasury yields have fallen over the past two sessions, but that means yields have come down, one agency trader said.

"The low yields are kind of warping the spread dynamics a little," the trader said.

A spread of 25 basis points over Treasuries in three-year agency notes when yields are 1.5% becomes more significant when yields are just 1%, the trader said.

"You're talking about picking up an extra 33% in yields compared to an extra 20%," the trader said. "I think that's partly why spreads have been a little sticky both ways, especially at the front end."

Agencies are also more attractive compared to Treasuries at these spread levels, and many investors are readily buying on any widening even in the face of high primary market volumes on the high-grade corporate side.

"Not everyone can buy corporates," the trader said. "Those who can't buy agencies, and agencies are still getting a lot of bids," the trader said.

Fannie Mae ahead

The market still had not formed a strong opinion about what Fannie Mae will do Thursday when its calendar opens for a possible offering of Benchmark Notes.

"I've heard it's coming, heard they're not coming, heard they're going to do a small deal," Riley said. "If they do come, I think it's going to be a three-year."

The other trader said Fannie Mae may have taken care of most of its funding needs in its two previous offerings, and may only do a small deal this week.

"Pricing levels are quite attractive now, but I don't think their needs are that great," the trader said. "They just had $5 billion in two-years and $7 billion in three-years before that, both pretty big deals. I think they'll probably just do a reopening this week, two- or three-year."

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