Agencies ease wider as Treasuries rally, investors take profit; Fannie Mae skips issuance

By Kenneth Lim

Boston, May 3 - Agency spreads nudged wider on Tuesday as the market continued to take profit amid a rally in Treasuries.

Bullet spreads closed about half to 1 basis point wider across the yield curve, said Guggenheim Partners head of agency trading Mike Goldman.

"Agencies had this big day on Friday, and yesterday was a steady, quiet day, and today was just a shade weaker," he said.

The callable market saw decent volume, with just over 40 new issues on the day well spread out among different maturities.

"Most of them were small, but they were all throughout the curve," Goldman said.

Fannie Mae passes

Fannie Mae said Tuesday that it would not use its calendar slot to issue new Benchmark Notes this week.

The agency's next issuance opening is on May 11.

"It looks like they tried to tighten on the Fannie Mae pass, but it wasn't enough," Goldman said.

Part of the muted response was as relatively high level of expectation that Fannie Mae would skip the slot, especially because the agency has another calendar date just a week later.

"Next week is the next one, and given how little funding they need, it's not a surprise if they pass," Goldman said.

Another agency trader said investors are also more likely to see supply next week now that Fannie Mae has passed on its first slot of the month.

"It was going to be either one or the other," the trader said. "People didn't want to make any kind of a trade now that they're going to have to reverse next week."

But the trader thought that the general lack of supply - Freddie Mac also passed on its announcement date the week before - will keep spreads relatively tight.

"It's not this one specifically, but just the general trend with all the [government-sponsored enterprises] passing more this year," the trader said. "Supply is really drying up. That's going to keep spreads from getting too wide."

Investors take profit

Tuesday's market was also affected by profit-taking, especially at the longer end of the yield curve, because of the recent rally sparked by an advisory body's recommendation to the Federal Reserve that fails charges be implemented for agency and agency mortgage-backed securities trading.

"There's been a little bit of flow lately in intermediate to longer bullets, mostly sellers, after the run-up we've had," Goldman said.

The other trader said agencies are also struggling to keep up with Treasuries, which have been climbing steadily for over a week.

"Agencies are lagging Treasuries," the trader said. "That's not unexpected because Treasuries have had a very, very strong week or two, and spreads just can't keep up with that kind of pressure."

But the trader said spreads will probably recover quickly if Treasuries come under profit-taking.

"Fundamentally things are very supportive of tighter spreads," the trader said. "Thinning supply, the fails charges, low yields. When you ask around, demand is still very strong for agencies."

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