Agency spreads mixed as GSE conference fails to yield news; market eyes Freddie Mac deal

By Kenneth Lim

Boston, Aug. 17 - Agency spreads closed mixed on Tuesday in languid trading as a strong performance with swaps offset the Federal Reserve's buying of Treasuries.

Bullet spreads narrowed by about 2 basis points in the two-year sector but widened by about 2 bps in 10-years, an agency trader said.

The market enjoyed some tightening support on Tuesday as swap spreads came in on a wave of corporate issuance, which led to an increase in hedging.

"Swap spreads came in quite a bit today because there was quite a bit of corporate issuance," the trader said.

On the other hand, agencies faced pressure from the Federal Reserve's buying of $2.551 billion of four- to six-year Treasuries.

"You would think that would put some spread widening into agencies," the trader said. "But there was all that supply in corporates...and as a result they kind of offset each other."

Callables continued to see brisk activity, but the vast majority of transactions were reinvestments of notes that had been called. Investors are reluctant to make new investments in callables because of the richness of the market, the trader said.

"Bonds are getting called, and we're issuing new bonds," the trader said. "New issues are being printed regardless of the level. There's no real value in the market here."

Trading volumes were light on Tuesday.

"Spread movement was pretty quiet," the trader said.

Fireworks fizzle

The market had been hoping for some event-driven action from the White House's housing finance conference on Tuesday, but the party never got started.

Government officials and industry players on Tuesday met to discuss the future of Fannie Mae and Freddie Mac and the housing finance system.

Treasury secretary Timothy Geithner told participants that the Obama administration would "side with those who want fundamental change" to Fannie Mae and Freddie Mac, but he sounded a note of caution against moving too recklessly. The administration has said it will present a plan by January 2011.

The trader said the conference did not give the market much in terms of clarity or news.

"A lot of people were expecting some fireworks out of this mortgage conference," the trader said.

The market sold in anticipation of the conference, and a snapback could be coming now that there has been no news.

"A lot of people got nervous, and they sold last week ahead of the conference and this week, then what's happened is you know they're not really going to say anything," the trader said. "It hasn't come all the way back. I think tomorrow spreads should tighten a little just because nothing happened today."

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said the conference did little more than put already-known stances on the record.

"It doesn't look like much was discovered there," LeBas said. "I spoke with a Congressman today, and he said that most of the positions today were already known, but it was just a matter of putting out in the public."

Freddie Mac ahead

Investors are looking to Freddie Mac to enliven the market with an announcement on Reference Notes issuance on Wednesday.

A number of traders have said a three-year offering is possible, because that part of the curve is the richest at the moment, so it would be the cheapest area in which Freddie Mac can raise capital.

A reopening of two-years is also possible, but the agency could also choose to skip for the second time in a row, the trader said.

"None of the agencies really need the funding right now," the trader said. "They can get better funding in the callable market...They can do a callable at minus 20 [bps from Libor] or at minus 25. Bullets are going to come at minus 8 or 9 [bps], so from their perspective it's better to do it in callables."

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