Agencies weaker in two-, seven-year sectors on rate selling; Fannie Mae could issue two-years

By Kenneth Lim

Boston, Oct. 5 - Agency spreads were mixed on Monday with selective selling in certain sectors as rate investors sold on yields.

"Agencies were kind of drifting today," said Mark Noble, head of agencies at MF Global. "It wasn't a very active day in agencies whatsoever."

The two- and seven-year sectors saw "rates-based selling," he added.

"The 10-year note has been in a range of 3.50% to 3.25% over the past quarter, and now with the 10-year slightly through that range - we closed at 3.18% last Thursday, before payrolls it was 3.20% and today it's 3.23% - we're seeing rate-based selling from accounts."

Another agency trader said volumes were also light because of a lack of clarity over where the economy is heading.

"We're kind of stuck in a range right now, so a lot of guys are just hanging out on the sidelines waiting to see what happens before making their move," the trader said. "You don't really want to buy or sell that much when you're just going to pick up a few points here and there. I think the stock markets and the bond markets have rallied quite strongly in the third quarter, now guys are trying to figure out which one is overdone and by how much before they come back."

Noble said the first few days of the fourth quarter have not disappointed, partly because the Federal Reserve provided some support with its announcement that its weekly outright coupon purchasing program will be extended by three months to the end of March 2010.

"The commitment from the Fed has been strong," he said. "They extended the program through the first quarter of 2010, so that took a lot of fear out of the marketplace. A lot of dealers were concerned that foreign accounts and the central bank would be stepping away at the same time."

Fannie Mae announcement ahead

Fannie Mae is expected to announce on Wednesday whether it will issue new Benchmark Notes.

"We're expecting new two-years from them," Noble said. "The last ones they did in that sector were the April 2011s, which was about six months ago. And the curve's pretty steep there."

Noble said a Fannie Mae issuance may not necessarily push two-year spreads wider because the supply could be offset by additional investor interest.

"To be honest, when there's no issuance, there's no reason to focus on the product a lot of times," Noble said. "The fact that they're issuing should bring some focus back on the product, which could end up being a positive."

The other agency trader added that a Fannie Mae deal will likely do well because of persistent themes of tight supply and Fed support.

"You know it's going to do well," the trader said. "Same old story: Supply's going to be thin for the foreseeable future because the GSEs don't have the funding needs, plus the Fed's always lurking in the background. Guys will buy hoping to sell back to the Fed in a few weeks."

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