Agency spreads widen on fears agencies need more Fed help; Fannie Mae to announce Benchmarks

By Kenneth Lim

Boston, Dec. 15 - Agency spreads widened across the yield curve on Tuesday amid reports that the regulator of the housing government-sponsored enterprises may be seeking an increase in federal help for the agencies.

The news was a bump in the road on an otherwise quiet session with the market eyeing a quiet week. Speculation on Fannie Mae's Wednesday announcement on Benchmark Notes issuance has not changed, and nothing significant is expected out of the Federal Open Market Committee meeting.

Bullet spreads shifted outwards about 2 to 3 basis points across the curve, a clear reversal from recent tightening.

"Spreads were a little wider today," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial. "There was news about the overseer of Fannie Mae and Freddie Mac wanting to renegotiate with the Treasury and issue more preferreds this year, rather than waiting to next year."

The market was quiet beyond that news.

"There's nothing else really going on," Riley said. "The Treasury market was up, then finally down again, especially at the long end...It's not unusual this time of year."

FHFA under focus

A report by Bloomberg on Tuesday said the Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac and Federal Home Loan Banks, may be asking the Treasury to increase a $400 billion federal emergency fund and to lower the interest payments on drawdowns. The agencies have drawn about $112 billion so far.

"I think the headline maybe put some fear in some of the larger investors and larger institutional investors that there are still some problems with Fannie Mae or Freddie Mac," Riley said.

But Riley did not expect the result of any negotiations to have a major impact on the markets.

"Honestly, I don't think it's going to make a difference," he said. "They've got the ability to draw down $400 billion, they've only drawn $112 billion. They clearly want that to be adjusted for any problems going forward. Maybe you got a double dip in housing problems. Our analyst doesn't see that, but who knows?"

The Treasury may increase its lifeline to the agencies without Congressional approval until Dec. 31, and the current talks may be more a function of not wanting to have to go through Congress again.

"If you ask for and get it this year, you might have less problems with asking with a new Congress next year," Riley said.

Steady winds for Wednesday

The market will hear from Fannie Mae on Wednesday whether the agency will issue new Benchmark Notes as part of its issuance calendar.

The market appears to be speculating on three possible scenarios: that Fannie Mae will pass on the issuance, reopen an existing five-year series or offer new three-year notes.

"I think it's going to be either a new three-year or a reopening of a five-year," Riley said.

The FOMC will also wrap up its last meeting for the year on Wednesday, but Riley does not expect any significant policy changes from the central bank.

"I don't think there are going to be any changes," he said. "At a minimum six months down the road, we'll see stable interest rates. I just don't think they have any room to move."

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