Agencies widen on profit-taking as normalizing market brings back flows; Fannie Mae eyed

By Kenneth Lim

Boston, Aug. 15 - Agency spreads widened slightly on Monday amid profit-taking in shorter maturities as the market seemed to glimpse a bit of normalcy after an extremely volatile week.

Bullet spreads eased out by about half a basis point versus Treasuries in the five-year sector, an agency trader said.

"I think we've just been under a little bit of profit-taking and the curve's a little flatter," the trader said.

The callable segment saw solid activity as the recent drop in yields and the Federal Reserve's assurance that short-term rates will be kept low until mid-2013 have encouraged another wave of early redemptions.

"There's a lot of call redemptions with the move lower in yields," the trader said. "Some investors had more bonds called, which is more money in their pockets, which is the last thing they need right now."

Negotiated deal levels had richened over the weekend, but callable auction paper appeared to still have value for investors, the trader said.

"Demand there remains strong," the trader said. "If it's unhedged, it's moving out the door at par, and if it's hedged, it's going out at a slight premium."

Despite the strong pressure for early redemptions, issuers are also wary about being too aggressive in going for better yields because demand may not follow, the trader added.

"They're holding back a little bit until they get a sense of what they can reissue," the trader said. "If they can't reissue it and get the funding that they need, they won't call it."

Sigh of relief

The market seemed ready to move on from the turbulence of the previous week, when credit downgrades by Standard & Poor's, concerns about the economy and the Fed's decision on rates combined to toss markets around.

On Monday, stock markets rallied and Treasury yields eased off of recent highs, giving investors some room to maneuver.

"Right now the market's taking a big, deep breath after last week's price action," the trader said. "The whole downgrade is now kind of a moot point, and it's more about the economy and the Fed on hold until 2013. It's simply turned into a yield grab fest."

Investors sold more in the front end of the yield curve on Monday, and there was better buying farther out on the curve, suggesting a hunt for better yields.

Trading flows also improved, with enough interest in both bids and offers to avoid the illiquidity that affected the middle of the previous week.

"It's better, but at the same time there's not much to do," the trader said. "Last week was more of a reactionary market, with a lot of forced trades, as opposed to today when there's...a more tempered flow. Guys are more comfortable making markets."

Fannie Mae ahead

Fannie Mae could announce an offering in the two- or three-year sectors on Tuesday as part of a calendar slot, the trader said.

But there is also a good chance of a pass if front-end demand is soft overnight. Fannie Mae will be closely monitoring feedback from dealers on what the Street wants, the trader said.

"I think it depends on what happens overnight," the trader said. "They've already got a ton done in the discount note window over the last couple of weeks, so maybe they could come in and do a short issue. I'd say it's 50/50 between a pass and some sort of front-end issue."

© 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.