Agencies widen as investors choose to wait out Fed meeting; Fannie Mae may add supply

By Kenneth Lim

Boston, Sept. 20 - Agency spreads widened slightly on a slow Monday as investors crowded the sidelines to await the Federal Reserve's Tuesday meeting.

Bullet spreads closed wider in the five-year sector, but held firmer in the two- and 10-year sectors, said Michael Skinner, a trader at Wall Street Access.

"It was a very quiet day to be honest with you," he said.

Callable issuance was brisk at the front end of the yield curve, but spreads were wider.

"I know Fannie Mae and Freddie Mac were issuing callables a little bit cheaper today," Skinner said. "A lot of issues at the front end."

FOMC to meet

The Fed's Federal Open Market Committee has a one-day meeting on Tuesday, and investors are exhibiting some nervousness about what actions the central bank's key decision makers will take amid mixed signals about the economy's health.

The Fed's language could yield clues about its view on the state of the economy, while the market has also speculated about a possible expansion of the Fed's quantitative easing program.

Uncertainty about what the Fed will do has kept some investors away from making any major trades, Skinner said.

"I think whatever guys had to do, they probably did at the end of last week," he said.

"Personally, that's what I did. Guys got themselves set up at the middle and end of last week, rather than leave it to the final two days before the meeting and you didn't know if there would be enough liquidity."

Whatever the Fed decides will probably directly impact Treasuries instead of agencies, although the GSE market would still be affected by moves in Treasury yields.

"What [Fed chairman Ben] Bernanke's going to say is going to have more of an effect on Treasuries," Skinner said. "If he says something and Treasuries rally, agency spreads will probably lag. Spread products will probably tighten if he says something and Treasuries fall."

Skinner expects the Fed to stay the course on the economy and rates, especially with mid-term elections in November.

"I don't think they have to say anything more," he said. "I would be surprised if he went out of the range or the domain of what he said the last time around."

Supply ahead

The markets could be quiet until after the Fed meeting ends, Skinner said.

"There is some cash on the sidelines," he said. "Hopefully it gets put to work after tomorrow."

The market could get some supply on Thursday from Fannie Mae, which last issued $5 billion of new two-year Benchmark Notes on Aug. 27.

"Probably a front-end deal," Skinner said. "I don't see anything more than that right now."

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