Agency spreads narrow as Treasuries tumble further; House hearing, Fannie Mae supply on radar

By Kenneth Lim

Boston, Feb. 8 - Agency spreads tightened slightly early Tuesday on the back of yet another sell-off in Treasuries.

Bullet spreads were narrower by about 1 basis point just after midday as Treasury yields rose sharply following a disappointing auction of three-year Treasury notes.

Volumes, however, were weak as the Treasury market captured most of the attention of investors.

"It's still pretty quiet here," one trader said. "I think a lot of investors are busy putting out the fires in Treasuries and don't really have the time or the energy for agencies."

The Treasury sold $32 billion of three-year notes at a stop yield of 1.349% on Tuesday with a bid-to-cover ratio of 3.01 times. The auction came with a tail of 0.4 bp.

Non-dealer demand was a low 37.7%, disappointing analysts who had been expecting the recent spike in yields to generate interest.

"The auction was disappointing, to put it mildly," the trader said. "Yields are reacting to the auction, and we're still trying to find the top [of yields]."

Supply, meeting ahead

Agency investors were also wary about putting money to work ahead of what could be an eventful Wednesday for headlines. A subcommittee hearing in the House will discuss the future of Fannie Mae and Freddie Mac, while Fannie Mae has a calendar announcement on the issuance of Benchmark Notes.

The House hearing will probably turn out to be a non-event, the trader said.

"I seriously doubt there's going to be anything there that we haven't heard before," the trader said. "You're going to get some politicians doing some tough talking about cutting out Fannie Mae and Freddie Mac, but the reality is nobody's going to do anything until after the next elections."

Fannie Mae may pass on issuance on Wednesday amid the recent richening in funding, but if it brings a deal it will probably do so at the front end of the curve, the trader said.

"That's still the best place for them," the trader said.

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