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Agency spreads tighten as Fed announces it will buy agency debt
By Lisa Kerner
Charlotte, N.C., Aug. 27 - Agency spreads were tighter on Thursday 1 to 3 basis points across the curve in response to this week's announcement from the Federal Reserve Bank of New York of its plans to buy agency debt securities, according to trader Michael Skinner with Wall Street Access.
The New York Fed announced it will buy Fannie Mae and Freddie Mac debt maturing from March 2016 through July 2032 in an outright coupon purchase on Friday.
In its announcement, the Fed said the operation will open at 10:30 a.m. ET and close at 11:00 a.m. ET.
According to Skinner, the five-year and out sectors tightened 2 to 3 bps and that the overall tightening was "absolutely expected" after the announcement.
"The two-to-three year sector traded unchanged on the day against Treasuries but cheapened to the swaps market as Libor continues to come down," said Eric Herndon, a trader with BMO Capital Markets. "Flows were relatively light all day."
Herndon said the area of the Fed buy back is 1 to 2 bps tighter in what he called "a quiet day in spread land."
$4 billion expected
Looking ahead, Herndon is predicting the Fed to be in "for at least $4 billion" in its operation on Friday.
While the Fed announcement gave the long end a boost, Loop Capital agency trader Chris Denker called spreads "basically unchanged in the front end."
Volume, according to Denker, was less than average.
He noticed active buying of callables and off-the-run bullets in the last day or so.
"People are looking to grab some yield," said Denker. "Any sell off tomorrow [Friday] would be reversed out next week due to month-end buying."
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