Agencies widen on late surge in Treasuries as Fed keeps status quo; Freddie Mac could pass

By Kenneth Lim

Boston, April 27 - Agency spreads eased out slightly Wednesday, lagging behind a late comeback by Treasuries following the Federal Reserve's decision to leave interest rates at historic lows.

Bullet spreads closed the day about half a basis point wider versus Treasuries, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"Spreads were slightly better in the morning, tightened in about 1 basis point, but as the market came in later in the day spreads got back to even or maybe half a basis point wider," he said.

Trading volumes picked up as yield levels rose early in the day.

"We had a pretty busy day, actually," Riley said. "There was a fair amount of activity. The five-year [Treasury] auction went pretty well, and there was good buying in two- and three-year bullets."

The callable market remained sluggish.

"I don't see too much activity in callables today," Riley said. "But we had been moving a lot of five-year step-up bonds."

FOMC maintains status quo

Agency spreads could not keep up with a late rally in Treasuries on Wednesday after the Federal Open Market Committee voted to keep rates at current levels and to keep to the plan of ending the current round of quantitative easing at the end of June.

The central bank cited the persistently high unemployment rate for its decision to keep the Fed Funds rate at 0% to 0.25%. The Fed also said it expects the inflationary effects of higher energy and commodity prices to be "transitory."

While the Fed will end the current $600 billion round of quantitative easing this quarter, as previously announced, it will also continue to reinvest money from its current portfolio as assets mature or are redeemed.

"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," the Fed said in a statement.

The market did not get much additional information from Fed chairman Ben Bernanke in the first post-meeting press conference for the central bank, Riley said.

"We knew they were going to say nothing," Riley said. "Everybody was expecting him to say something earth-shattering, but they just came out with the statement, and he's not going to say anything different. It was status quo, steady as she goes."

Freddie Mac ahead

Another trader said the market was not doing much setting up for potential supply from Freddie Mac, which will make an announcement on Reference Notes Thursday.

That lack of concern among investors was partly because of the distraction of the Fed meeting and also because the market is not expecting much supply from the agency.

"I think they could pass or maybe do a reopening," the trader said. "They really don't need the funding right now, and they just came out with a five-year a few weeks back."

If Freddie Mac does not issue any new benchmark bullets this month, it also has two opportunities in May.

"They have two dates next month, so if they don't come with something tomorrow, they'll be comfortable waiting until May," the trader said.

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