Agencies nudge wider on Treasury gains, possible supply; Fannie Mae Benchmarks ahead

By Kenneth Lim

Boston, April 19 - Agency spreads closed a touch wider on Tuesday as investors laid low amid a gain in Treasuries and possible supply in the pipeline.

Bullet spreads modestly lagged Treasuries on a day when Treasury yields eased just slightly lower.

"Spreads have widened a touch," said Michael Skinner, an agency trader at Wall Street Access. "We gave a little bit back yesterday and today...but I'm not sure how much to read into it."

Skinner said market levels were a little complicated to decipher because market volumes were extremely light with the holiday-shortened week. Friday is a market holiday for Good Friday.

"It was a very quiet session because of the holiday week," he said. "Flows have been exactly what you thought they'd be."

The callable market was also unremarkable.

"We've seen some stuff on the tape, but not a whole lot," Skinner said. "Flows have been average. A couple of dealers are doing some stuff, but that's it."

Calm after storm

The market appeared to have moved past Monday's scare, when Standard & Poor's downgraded the outlook for United States debt to negative from stable, citing the risk that lawmakers would not be able to address the country's mounting budget deficit.

"The initial kneejerk reaction came yesterday," Skinner said.

The trader said the S&P decision was more of a "warning shot across the bow" for legislators than for the market.

One downside to the news was that the change in the credit quality of U.S. debt led to a sharp overperformance in swaps. Agencies continued to lag swaps on Tuesday.

"Versus swaps we have not really made up any ground," Skinner said.

A day after the S&P downgrade, the front end of the yield curve looked rich, given that the bulk of any concern about U.S. credit quality affects longer maturities more.

"Parts of the curve look OK," Skinner said. "The front end seems a little rich. Five-year securities look a little attractive."

Fannie Mae ahead

Fannie Mae is expected to make an issuance announcement on Wednesday, and the agency could forgo the calendar slot, Skinner said.

"There's Fannie Mae tomorrow, and I won't be surprised if they pass," he said. "I think a pass or a small reopening. They don't have funding needs."

Skinner added that callable funding levels are very attractive for issuers at the moment, and Fannie Mae can get much better funding by tapping the callable market instead of issuing bullets.

A Fannie Mae deal would probably be the best chance for investors to get anything done this week, he said.

"I think tomorrow is probably your best bet to get something done," Skinner said.

With Federal Home Loan Banks and Federal Farm Credit Banks issuing debt the previous week, a Fannie Mae deal would add to the current supply pressure on spreads, which is exacerbated by the lack of volume in the market, Skinner said.

"We've seen a lot of supply," he said. "But I think we will see it tighten when people come back after the holiday."

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