Agencies push further as investors await Freddie Mac supply; status quo seen from Fed meeting

By Kenneth Lim

Boston, Nov. 3 - Agency spreads continued to widen on Tuesday as skittish investors anticipated additional supply from Freddie Mac and a statement from the Federal Reserve.

Bullet spreads were wider across the yield curve, an agency trader said.

"Spreads in general are wider," the trader said. "I think people are either taking money off the table rates-wise ahead of the Fed announcement tomorrow, as well as ahead of supply from Freddie Mac."

The market also suffered from weakness in the Temporary Liquidity Guarantee Program sector, in which issuance of new debt that is backed by the Federal Deposit Insurance Corp. ended at the end of October.

"Some of the FDIC paper, the program has come to an end, which has led to some widening, and agencies have followed them a little wider," the trader said. "We've also got a strong Treasury rally."

Trading volumes remained weak with investors mostly unwilling to make any major bets.

"I would say right now the amount of news that's going to come to the market in the next three days is trumping anyone's willingness to put money into the market, especially after the run-up that we've had," the trader said.

Fed could stay the course

The Federal Reserve's Open Market Committee wraps up its meeting on Wednesday, and investors are largely expecting the central bank to extend the status quo on interest rates and its view on the economy, the trader said.

"I think everyone's kind of chitchatting about what happens if, but on the most part I don't really expect anyone to change course or wording," the trader said. "But having said that it's still giving investors pause...they figure they may as well wait.'

Investors will probably return to the markets once the uncertainty of the Fed meeting and Friday's employment figures are over, the trader added.

"If they don't announce anything different, if they stay the course, then I think you will see people come back to the markets if they get any kind of backup," the trader said. "You have the employment numbers on Friday. The numbers are continuing to shape up, the numbers are dropping in the negativity, but if the unemployment rate hits 10%, optically that's so important."

George Goncalves, chief fixed income rates strategist at Cantor Fitzgerald, also predicted a "steady as she goes" stance on rates, the economy and the quantitative easing programs from the Fed heading into the year-end.

But the analyst expects the positive impact of the Fed's remaining purchases of agency debt and mortgage-backed securities to fade as the programs come to an end after the first quarter of 2010.

"We believe the bulk of the positive knock-on effects from the Fed's [quantitative easing]...are mostly behind us as the Fed's balance sheet growth is starting to slow on a year-on-year basis," he wrote in a note.

The Fed will probably use roll-off as a key method of reducing its agency debt holdings after the program ends, Goncalves wrote, adding that about half of its agency debt buying so far has been in the one- to four-year sectors.

"Having issues roll off and mature is an automatic 'pre-built' exit strategy by the Fed," he wrote.

Freddie Mac in the sights

Freddie Mac could issue new Reference Notes in the short end of the yield curve this week, another trader said.

The agency is scheduled to make a calendar announcement on Wednesday.

"We're seeing some selling at the front end probably because of Freddie Mac," the trader said. "The market's expecting around three-years. I'm sure it's going to do well wherever they issue them."

© 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.