Agency spreads hover ahead of Treasury auctions; Fannie Mae could sell two-year deal: sources

By Kenneth Lim

Boston, Aug. 24 - Agency spreads ended mostly flat on Monday as investors stayed out of the market ahead of Treasury auctions later in the week.

Bullet spreads were tighter by about 1 to 0.5 basis points across the yield curve, said Christopher White, senior vice president of fixed-income sales and trading at Moors & Cabot Capital Markets.

"Right now we're seeing the three-year Freddie Mac Reference Notes offered plus 33 bps, five-years are plus 45 bps, and two-year [Federal Home Loan Banks] are plus 23 bps," he said. "So basically unchanged."

Auctions in spotlight

Investors will be watching the Treasury auctions later in the week for an indication of where rates could be heading and overall demand for rates, an agency trader said.

The Treasury will auction $42 billion of two-year notes, $39 billion of five-year notes and $28 billion of seven-year notes this week.

"The market's interested in how much demand there is in the market for certain sectors," the trader said. "If the auctions go really well and yields continue to be low, that could mean the market's still hungry for high-quality debt. If the auctions do poorly, we could see some selling just on general concerns about where rates are heading."

But the trader added that the typically slow time of the year could affect market reaction.

"Unless there's a major surprise one way or the other, I don't expect to see any major changes this week," the trader said. "A lot of people are out this week, just before back to school, so any kind of market reaction is going to be a little muted."

Moors & Cabot's White also did not expect to see the same level of selling pressure like in the previous week, when spreads widened sharply.

"Frankly, I think this is the third week in August and obviously Europe is barely open," he said. "And so I don't think we're going to see net sellers out of the continent. Here in the States it's almost as bad."

Fannie Mae to announce

Fannie Mae has an issuance announcement of Benchmark Notes scheduled on Wednesday.

White said the Street has not given clear indications of whether and where the agency will raise debt but noted that "right now Fannie Mae's needs are somewhat light."

The trader, who agreed that Fannie Mae does not need a large amount of funding, said a small deal in the front end of the yield curve is probably likely.

"I'm not expecting a lot, probably two-years," the trader said. "They just did five-years, did three-years before that, but they haven't done any two-years in a few months. The Fed just bought a bunch of two-years, so there could be some capacity in that sector. They could go further out on the curve also if they want to add some liquidity there - no one's done a 10-year in a long time - but they're not going to get the kind of pricing they want out there, so I would classify that as possible but unlikely."

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