Agencies end flat amid supply distractions; Fannie Mae expected to sell two-year notes

By Kenneth Lim

Boston, Jan. 11 - Agency spreads closed flat on an uneventful Tuesday as supply in Treasuries and corporates distracted fixed-income investors.

Bullet spreads closed unchanged versus Treasuries, with trading volumes languishing in the doldrums. The front end of the curve came under slight pressure, but widened only by about half a basis point. Five- and seven-year notes were better bought by a touch.

"It was very, very quiet," an agency trader said. "Spreads didn't do a lot today."

While most of the agency market has cheapened since the start of the new year, the long end of the agency yield curve has actually tightened a little bit. But that tightening has more to do with the shortening of the agency yield curve, because the agencies have not been issuing new bellwether bullets at the long end since the financial crisis in 2008.

"There's a lot of curve involved there," the trader said. "When sevens-10s [spreads] or 10s-bonds move in, a lot of it is actually curve rather than actual spread tightening."

The callable market also struggled to find much action, with issuance slowing to just a trickle.

"Guys are just working off balances they already own," the trader said.

Volumes stay depressed

Trading volumes continued to be lackluster as Treasury and corporate supply seemed to leave investors with little time for agencies.

"It was kind of busy last week with non-farm payrolls, but I was a little surprised that this week seemed quiet," the trader said. "Guys are either dealing with new corporates or Treasuries and just don't have time for agencies this week."

Volumes might not improve much the rest of the week, with a snowstorm expected to hit New York on Wednesday and Treasury auctions slated for Wednesday and Thursday.

The coming Monday, Jan. 17, is also a market holiday to observe Martin Luther King Jr. Day, and that could further dampen market activity, the trader said.

A supply announcement by Fannie Mae on Wednesday and the end of the Treasury auctions could possibly bring some investors back to the market, but the trader was betting that volumes would only recover after the weekend.

"Next week a good chunk of corporate supply should be gone, and Treasury supply will be done," the trader said.

Fannie Mae announcement ahead

Fannie Mae will make a calendar announcement on the issuance of Benchmark Notes on Wednesday.

The market is widely expecting the agency to issue new two-year notes around Libor minus 9 bps, the trader said.

A three-year could also make sense from a funding perspective, but given that Freddie Mac just issued $6 billion of three-year notes a week ago, Fannie Mae might be reluctant to test demand in that sector, the trader added.

"It would be better from a Libor perspective for the issuer, but given that Freddie Mac just did a three-year, I don't think they'll do another three-year," the trader said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.