Agencies narrow on month-end trading, FOMC optimism; market outperforms Treasuries, swaps

By Kenneth Lim

Boston, Oct. 29 - Agency spreads tightened in most sectors on Friday on the back of month-end trading and optimism about the coming Federal Reserve meeting.

Bullet spreads widened in the two-year sector and were flat in threes, but five-years and longer maturities narrowed versus Treasuries on Friday.

"Going into month end, [we] saw nothing but money managers buying across the curve," said Mark Noble, head of agency at MF Global. "They were selling out some short-dated paper as the market got into really, really tight levels, but they were buying everywhere else on the curve."

Callable issuance was affected by the rates rally.

"There was a little reluctance...the market rallied quite a bit today," Noble said. "But buyers' mentality is still to buy on the dip."

Positive week

Agencies outperformed both the Treasury and swaps markets over the past week and during the month of October, Noble said.

"On the month, on a Libor level we're definitely tighter," he said.

Fannie Mae, in particular, was a major issuer of benchmark bullets during the month, selling $8 billion of two-year notes on Oct. 6 and another $8 billion of three-year notes on Thursday. The agency also reopened a series of five-year notes for $1 billion on Thursday.

That supply was easily absorbed by the market.

"The iron was hot and they struck," Noble said of Fannie Mae's fundraising during the month.

Kim Rupert, managing director of fixed income analysis for Action Economics, said there are a lot of investors who are searching for safe assets that offer better yields than Treasuries.

"Basically there's so much money around, and with Treasuries as rich as they are, guys are looking for other places to park their money," Rupert said. "The agency market is tied to some of the housing stuff, and with foreclosure problems, there's a little bit of trepidation there, but I don't think at this point the market thinks the foreclosure stuff will be a major problem."

Pivotal week ahead

Investors will have plenty to deal with after the weekend, with the midterm elections on Tuesday, the same day that the Federal Open Market Committee meeting begins.

The FOMC meeting ends on Wednesday, and the market is widely expecting the central bank to say it will buy more government debt. Quantitative easing, as the Fed's purchasing is called, has been the main focus of the market, and optimism about the program has been pulling spreads into richer territory.

"We've got the Fed on hold, QE2 coming, and spreads have been grinding tighter and tighter the whole week," Noble said.

© 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.