Agency spreads tighten as Geithner stresses support for Fannie Mae, Freddie Mac; Fed to buy

By Kenneth Lim

Boston, March 23 - Agency spreads tightened on Tuesday as U.S. Treasury secretary Timothy Geithner told legislators that it was crucial to continue providing support to Fannie Mae and Freddie Mac.

The Federal Reserve Bank of New York also announced its final agency coupon purchase operation, giving a boost to the two- to four-year sectors.

Bullet spreads narrowed on Tuesday after Geithner stressed to the House Financial Services Committee that the government-sponsored enterprises had the full support of the Treasury.

"Spreads started to come in on that," said Mark Noble, head of agency at MF Global.

But the tightening came as swap spreads made a sharp move inward of just over 5 basis points, Noble added.

"The big talk on the Street was how much swap spreads moved in. ... We really underperformed the move in swaps," he said.

No news is good news

Geithner's testimony in Congress did not offer much in terms of market-moving remarks, Noble said.

"Today everybody was concerned about the GSE hearing, but I think not much news came out," he said. "Geithner spoke well. There were no tape bombs or concerns."

In his written testimony, Geithner told House representatives that there should be no doubt about the Treasury's support for Fannie Mae and Freddie Mac while their future was being decided.

"It should be clear that the government is committed to ensuring that the GSEs have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations," Geithner said.

An agency analyst said that while the Treasury has reiterated its backing many times, Tuesday's testimony was notable for the strength with which Geithner expressed that support.

Another takeaway from the hearing was that the Treasury will seek public comments on April 15 regarding the restructuring of Fannie Mae and Freddie Mac.

That decision suggests that any changes to Fannie Mae and Freddie Mac could take some time to be finalized. The fact that the Treasury now has the luxury of seeking public comment rather than rushing through patchwork solutions also suggests that there is some stability in the GSEs and the housing market, the analyst said.

Federal Home Loan Banks also came under the spotlight, with its exposure to nonperforming loans also raised as a possible target of any restructuring.

"They have a lot of impairments on subprime real estate bonds that they bought," the analyst said. "But a lot of that you don't see because the Fed changed the accounting rules. ... FHLB is not immune to potential restructuring."

Fed to end buying

The Fed announced its final purchase operation for Wednesday, targeting agency notes due March 2012 to 2014.

The action will be the final one for the Fed, which has been buying agency coupons since December 2008 as a way to provide liquidity in the agency market. The Fed has already bought $167.5 billion of agency paper out of a maximum of $175 billion.

The Fed announcement helped spreads to move in slightly on Tuesday, Noble said.

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