Agency spreads flat ahead of expected Treasury announcement; lack of supply mutes volumes

By Kenneth Lim

Boston, Feb. 10 - Agency spreads closed mostly flat on Thursday ahead of an expected announcement by the Treasury Department on the future of Fannie Mae and Freddie Mac.

Bullet spreads ended unchanged amid thin trading volumes as Treasuries resumed their downward path.

"I'd call it unchanged on the day," a trader said. "The belly was a slight underperformer because they're more sensitive to changes in the curve there, but otherwise agencies are kind of just going along for the ride and not doing much."

Callables remained quieter than average following Wednesday's drop in yield levels.

"Guys are still trying to get through some of their old stuff," the trader said.

Treasuries fall again

The ongoing struggle of Treasuries resumed on Thursday after getting a break on Wednesday, and the prospect of higher yields is keeping some money on the sidelines, the trader said.

"The Treasury market's highly volatile and the market's still trying to figure out where the top in yields is," the trader said. "In the meantime guys are putting off on buying because they think yields are going to keep on going up. If you're looking for yields, if you can afford to wait for a while you'd wait for a while to see if you can get a better yield."

Fannie Mae's decision not to issue new Benchmark Notes on Wednesday also snuffed hopes of a supply-driven interest in agencies.

"When there's no supply there's very little trading," the trader said.

GSE announcement expected

Investors were also wary of making any major moves ahead of the Treasury's expected announcement on Friday of a plan for the future of Fannie Mae and Freddie Mac.

The Treasury is widely expected to present three options that Congress can adopt: to completely remove the government's role in guaranteeing housing mortgages; to transition to a limited guarantee system where the government can still step in easily in case of another housing crisis; or to maintain the status quo.

The Street does not appear to expect any major market movement from the announcement because the non-committal plan will probably not settle on a single solution, and the options offered seem to cover both ends of the spectrum.

Nevertheless, investors chose to be cautious, if only because they can afford to do so now.

"The market's so volatile right now," the trader said. "Guys were inclined to stay on the sidelines anyway, and there's very little cost in sitting on your hands right now just in case we get a surprise."

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