Agencies widen; investors step away from risk amid Moscow blast, possible GSE report delay

By Kenneth Lim

Boston, Jan. 24 - Agency spreads widened slightly on Tuesday as investors shed risk amid a bomb explosion in Moscow and uncertainty about the future of Fannie Mae and Freddie Mac.

Bullet spreads eased out a touch on Monday, said Mike Goldman, head of agency trading at Guggenheim Partners.

"We're slightly wider today," he said.

Callables had an active session for issuance after the coupon hike just before the weekend.

"Toward the end of last week we did quite well, and we moved a lot of inventory," Goldman said. "A lot of deals came today."

Goldman said investors were taking risk off of their portfolios on Monday and at the end of the previous week.

"I think there's been a little risk selling recently," he said.

Investors may have been spooked by a massive bomb explosion at Moscow's Domodedovo Airport on Monday afternoon that authorities said killed at least 34 and injured more than 150. Russian president Dmitri A. Medvedev has called the blast an act of terrorism.

But some of the selling may have also had slightly more technical reasons after absolute yield levels fell ahead of the weekend.

"After the rates move that we had at the end of last week, the higher prices sometimes bring out higher selling, and we saw a little bit of that," Goldman said. "There's an overhang of dealer positions. We can sense the direction of dealer positions just by seeing that it seems easier to move one way over the other."

GSE report pushed back

The Treasury Department's expected report on the future of Fannie Mae and Freddie Mac may be delayed to the first half of February from Jan. 31, the Wall Street Journal reported over the weekend.

The delay is reportedly to make room for the president's State of the Union speech on Tuesday and for the White House's budget proposal on Feb. 13.

The uncertainty on that front may be putting a lid on market activity in agencies, Goldman said.

"I think there's a bit of uncertainty until we get Obama's plan for the GSEs, which is now going to be delayed two weeks," he said.

Nevertheless, Goldman said the market is not expecting any major short-term impact for the agencies.

"I think there's a wide range of expectations, but my personal view is nothing's going to get done in the sense that they'll outline ideas and kick around some changes but it's not going to be immediate," he said.

FOMC, Fannie Mae ahead

The market could continue to be quiet the next couple of days with the Federal Open Market Committee holding its first meeting of the year Tuesday and Wednesday.

"We tend to be quiet in front of FOMC announcements, and then the day of we tend to do more rates stuff," Goldman said.

Fannie Mae has an issuance announcement slotted for Thursday, but hopes are dim for a large offering.

"At this point, they don't seem to have huge needs, and with valuations where they are, they could pass or come with something at the short end," Goldman said.

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