Agency spreads track swaps wider as rate yields fall; FDIC-backed note issuances come to end

By Kenneth Lim

Boston, Oct. 30 - Agency spreads eased wider on Friday as Treasury yields remained low following a strong week of auctions, while investors marked the end of the Temporary Liquidity Guarantee Program's issuance window.

Bullet spreads followed swaps wider by about 1 basis point at the front end of the yield curve and about 1 to 2 bps further out on Friday, said Mark Noble, head of agency at MF Global.

"Agency spreads kind of drifted wider with swap spreads," Noble said.

Volumes were unsurprisingly thin, given the usual slowdown just ahead of the weekend.

"Volumes were a little bit lighter because of the Friday," Noble said. "When we have a big move in the Treasury market, that's where most of the investors are looking."

Treasury shadow

The Treasury market drew most of investors' attention on Friday as investors flocked to the defensive assets amid a sharp drop in equities.

The past week also saw strong Treasury auctions, with almost $120 billion of two-, five- and seven-year Treasury notes sold, which added to confidence in the rates markets.

"It was really more about the rates market today," Noble said. "Overall rates have come down. We've had three successful auctions...yields came down so substantially."

Even the callable segment, which continues to generate strong investor interest, was slightly quieter on Friday.

"There's still strong demand for callables," Noble said. "Again, today there was not a lot of issuance because we rallied so much in rates today. The coupons are not as attractive than at the beginning of the week."

TLGP chapter ends

Friday also marked the end of the issuance period for notes under the Federal Deposit Insurance Corp.'s TLGP. Because of the federal backing of those notes, they often occupy the same niche as more traditional agency debt.

"It's R.I.P. of the TLGP product," Noble said. "There's no more issuance except in emergency cases."

The program, which was approved by the FDIC on Oct. 13, 2008, will guarantee notes that have already been sold under the TLGP until June 30, 2012 or the maturity of the debt, whichever is earlier. But some debt can still be issued under the program until April 30, 2010 on a case-by-case basis.

The National Credit Union Administration's temporary corporate credit union liquidity guarantee program, however, will allow issuances until June 30, 2010.

Noble said it remains to be seen how the markets will react going forward. The thin volumes on Friday did not provide enough of a basis to make a call.

"It's really hard to tell because today being a low volume day, and with spreads drifting wider with rate levels," Noble said. "Time will tell."

One possibility is that the market will slip a little off the radar for some investors.

"When there's not issuance, there's less of a focus on the product," Noble said. "The amount in the program has grown pretty quickly and it's pretty big, but a lot of times, when you have no issuance, there's not as much interest in the product."

Freddie Mac up next

The coming week will see Freddie Mac possibly announcing a new issuance of Reference Notes on Wednesday.

Freddie Mac last sold $3.5 billion of two-year Reference Notes on Oct. 20.

"The excitement's going to be on Wednesday," Noble said. "We've got an announcement coming out of Freddie Mac. We're expecting to see some form of front-end issue, probably split between new five-years or three-years. There's a higher percentage for three-years because of Libor valuations."

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