Agencies narrow as Treasury supply, FOMC meeting approach; investors look past S&P moves

By Kenneth Lim

Boston, April 25 - Agency spreads nudged tighter on Monday as investors looked ahead to supply and the Federal Reserve's monthly meeting.

Bullet spreads closed about half a basis point tighter on the day, one trader said.

"Agencies are about half tighter on the day," the trader said. "It was a little bit of a slow day here."

Mary Ann Hurley, a trader at D.A. Davidson & Co., said trading volumes were nevertheless an improvement over the previous week, when the Good Friday holiday kept activity muted.

"Following the holiday, we're seeing a little bit more activity," she said.

FOMC, supply in focus

The market was looking ahead to what could be an active week for supply, with the Treasury Department selling $99 billion of two-, five- and seven-year notes Tuesday through Thursday.

On Thursday, Freddie Mac is also expected to announce a new offering of Reference Notes, although traders said market speculation was quiet on the deal.

Investors are also closely watching the Federal Open Market Committee's two-day meeting Tuesday and Wednesday, with Fed chairman Ben Bernanke slated to give a press conference after the policy-setting session. This will be the first time the Fed chief will be meeting the press after the monthly meeting.

"I think he'll use it to drive home his viewpoint that rates are going to be unchanged for a long period of time," Hurley said.

Hurley expects the Fed to maintain a dovish tone on monetary policy, to stay with its current round of quantitative easing until its scheduled end in June and to keep the doors open for future easing action.

Market shrugs off downgrade

The market seemed to have moved past Standard & Poor's move on April 20 to downgrade the outlook for debt issued by the government-sponsored enterprises in order to keep in line with a similar action on U.S.-issued debt. The outlooks for Fannie Mae, Freddie Mac, Federal Home Loan Banks and Farm Credit System Banks were cut to negative from stable.

"We widened out a little bit last week on the news that S&P had put all of the agencies on outlook negative, but I think we've recouped most of that, and we're back to where we were before that happened."

Hurley said the market remains concerned about the longer-term risk of a deficit-driven crisis, but in the near term views remain largely stable.

"I think the S&P outlook is a longer-term outlook," she said. "So for the near term, I think people just have the same amount of concern about the general direction of red ink...Any agency defaults I think are unlikely."

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