Agencies narrow as rates stability spurs some modest buying; Freddie Mac skips issuance

By Kenneth Lim

Boston, Feb. 24 - Agency spreads closed a touch tighter on Thursday as some stability in rates emboldened buyers.

Volumes, however, remained sluggish without supply from Freddie Mac to spur trading. The agency said Thursday that it would skip a calendar slot.

Bullet spreads ended the day just slightly narrower versus Treasuries, said Guggenheim Partners' head of agency trading, Mike Goldman.

"Spreads today were marginally tighter after being a bit wider the past two days," he said.

The callable market saw steady volumes, with step-up structures still seeing good interest.

"Every time the market rallies, it's more likely that bonds will get called," Goldman said.

The main weakness in the market was the slow pace of trading. Uncertainty about the Middle East unrest and about the economy are taking a toll on investors.

"There's so much uncertainty in the world right now, it's very, very hard to make a call," Goldman said. "Personally for me, I'm just trying to keep positions a little more squared because there's so much potential for big moves; it's very difficult to have a longer-term view."

Market sees quiet strength

The lack of movement in spreads and trading is partly a result of the market being so rich, having tightened after the White House reaffirmed its commitment to existing agency debt in a paper on the future of Fannie Mae and Freddie Mac.

But investors can find some comfort in the fact that the market has not widened by much in the face of a flight to safer Treasuries, sparked by unrest in the Middle East.

"The agency market is hanging OK," Goldman said. "It doesn't feel like there's a ton of buying, but no one's really selling either. Given what's going on overseas, you'd think spreads would widen, but they haven't really. Agencies leaked a little wider, but any time there's a little bit of stability spreads come back in."

In fact, agencies have outperformed swaps, so the market is doing better on at least one benchmark.

Freddie Mac passes

Freddie Mac said Thursday that it will not issue new Reference Notes this week.

The agency's next calendar issuance slot is on March 9.

The announcement was not a big surprise for many in the market, with some observers predicting that the agency did not need to raise any capital at this time.

But the confirmation that no benchmark supply would be coming may have helped spreads a little bit.

"Spreads overall have been rather tight since the release of the white paper, and we've got to a point where it's tough to attract new interest, but we got a little bit of wind behind the back today when Freddie Mac passed," Goldman said.

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