Agencies tighten as Treasuries find relief into weekend; Fannie Mae could skip issuance

By Kenneth Lim

Boston, Dec. 17 - Agency spreads finally broke the weeklong widening streak on Friday to narrow a touch as the Treasury market continued to recover.

Bullet spreads tightened by about 0.5 to 1.5 basis points across the yield curve on Friday.

The move brought welcome relief to a market that was hungry for some positive news, "especially after the number of weeks where spreads have been widening to higher yields," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

Callable issuance was thin in line with the quieter markets in general.

"We were seeing good flow, but issuance today was definitely on the lighter side," Hurley said. "It's year-end, and people don't want to add to the books now."

Newly issued callable paper, however, has attracted most of the attention because of the recent run-up in rates, Hurley added.

"The ones that have been issued this week, having higher coupons, have definitely generated some interest," she said.

Treasuries lead turnaround

Agencies found strength Friday as Treasuries rallied for a second straight day, the first time the 10-year Treasury yield has done so in December.

Treasuries gained on Friday as renewed concerns about Europe's credit stability combined with relentless selling for most of the month to tip the market toward buyers.

Moody's Investors Service cut Ireland's credit rating by five notches to Baa1 with potential for more downgrades, reigniting flight-to-quality bids in the markets.

"The reversal in the Treasury market has caused people to reach more toward agencies," Hurley said.

Thin volumes amplify moves

Hurley cautioned that the market may seem more volatile than normal partly because volumes have dried up. The 10-year yield, for example, has moved by more than 90 bps in six weeks, which is "an extremely large move," she said.

"Volume is still historically pretty light, just because a lot of people have closed their books for the year, so I think we have a lot fewer players moving the market currently," she said.

The day-to-day movements nevertheless indicate what the market's current sentiment is.

"I think it's accurate in that it depicts where the market's concerns are, but I think the moves have been exaggerated both on the upside and on the downside, but especially on the downside," Hurley said.

The agency market returns on Monday with Fannie Mae slated to announce whether it will issue new Benchmark Notes. The agency is widely expected to skip the calendar slot.

The primary benchmark bullet issuance calendar will end for the year after the Fannie Mae announcement and begin again on Jan. 4 with Freddie Mac.

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