Agencies widen slightly as investors pause from buying; Fed takes $1.4 billion at front end

By Kenneth Lim

Boston, Jan. 15 - Agency spreads eased outwards on Friday to end a generally lackluster week for the market as investors finally took a break from the recent shopping spree.

The Federal Reserve Bank of New York bought at the front end of the yield curve in an operation that held no surprises.

Bullet spreads were just slightly wider on Friday, with the longer end of the curve showing a tad more weakness, said Mike Goldman, director and head of agency trading at Guggenheim Partners.

"There was a little bit of a weakish tone," he said.

Trading activity was quiet as the market headed into a three-day weekend. U.S. financial markets close on Monday to observe Martin Luther King Day.

"Overall, there's been a bit of position squaring, but it hasn't been too active," Goldman said.

Fannie Mae's new 1.75% Benchmark Notes due February 2013, which priced Thursday, continued to hold firm, tightening slightly to a spread of about 29 basis points over Treasuries. The notes priced at a spread of 29.5 bps over Treasuries.

Callable issuance was "more of the same," with smaller deals dominated the primary market on Friday, Goldman said. Most of the deals were $100 million or smaller, he said.

Looking ahead, Federal Home Loan Banks has a calendar announcement on Wednesday for Global Notes.

Wider week

The week in general has seen agency spreads widen slightly, Goldman said.

"Overall on the week we're slightly wider," he said. "But that's kind of splitting hairs because it's only very slight."

The pullback is probably just investors taking a break from the recent rally, which was sparked by the U.S. Treasury. The Treasury on Dec. 24 announced stronger support for Fannie Mae and Freddie Mac, helping agency spreads to tighten considerably.

"When you get this tight on the back of buying, in the absence of follow-through buying you'll see some softening," Goldman said. "So I wouldn't read too much into it."

Fed buys at front end

The Fed on Friday bought $1.442 billion of agency notes due January 2011 to January 2012 as part of its weekly purchase program.

The amount purchased represented 30% of the $4.809 billion that was submitted. That percentage is on par with the previous operation. The purchase program ends on March 31.

"We did have the Fed purchase operation this morning," Goldman said. "It was very much as expected. They took 30%, which is what they've been taking lately. That brings our total up to $162.3 billion out of $175, so there's still plenty to buy. But they're getting near to the end."

The affected sectors did not move much in response to the Fed action beyond a slight narrowing at the front end of the curve on Thursday when the Fed announced the purchase, he added.

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