Investors reluctant to buy agencies at current spread levels, Guggenheim trader says

By Kenneth Lim

Boston, Jan. 5 - Investors are reluctant to add to positions at the current richness of the agency market, while callable step-ups should remain popular in 2010, said a report from Guggenheim Capital Markets.

Agency spreads are currently at historically tight levels, and some widening in the first quarter of 2010 is likely as investors react to the richness, wrote agency trader Mike Goldman in a report.

"It's hard to imagine that there will be much more spread tightening in the first quarter of 2010 as we have seen little customer interest in adding to positions at the current spread levels," he wrote.

On the callable front, persistently low front-end rates should continue to support the popularity of the step-up trade, Goldman wrote. Callable step-ups can allow investors to "match, and beat, the forward yield curve," he explained.

"We expect this trend to continue into the first quarter of 2010, and at least until imminent expectations of Fed tightening become commonplace," he wrote.

Goldman recommends five- to seven-year maturities for callable debt to take advantage of the steep curve, while one-time calls can minimize negative convexity if interest rates rise.

The weeks ahead will be marked by uncertainty over the fate of Fannie Mae and Freddie Mac, which are under federal conservatorship. A potential positive would occur if risk-based capital required to be held against agency debt is cut, as was the case with paper issued under the temporary liquidity guarantee programs. But even then the impact could be slight, Goldman wrote.

"This had minimal impact on TLGP paper when capital requirement was reduced for these holdings, and at best it may eliminate the preference that many banks have for [Ginnie Mae mortgage-backed securities] over [Freddie Mac] and [Fannie Mae] issued securities," he wrote.

"For these reasons, we would expect to see marginally wider spreads in the first quarter of 2010."

© 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.