Agency spreads inch narrower; volumes thin; Fed meeting, Fannie Mae might provide spark

By Kenneth Lim

Boston, Dec. 14 - Agency spreads tightened slightly on Monday as cherry-pickers sought selective trades across the board.

Bullet spreads were mostly unchanged, one trader said, with the five-year sector slightly tighter. Another trader said the longer part of the yield curve performed better.

"Spreads are a little bit tighter, particularly out the curve on the selloff in Treasuries," the second trader said. "You've seen some rate buying."

The callable space continued to see strong demand, the trader added.

"The callable market, that continues to print a lot of deals, although they tend to be more of the step-up nature and regional-type flows," the trader said.

The market in general lacked any clear themes, and trading volumes were thin.

"We have seen inquiries but there's really no strong pattern right now," the trader said. "People are kind of sitting tight to see how far the stock market goes."

Holiday window dressing

Investors were only making selective trades here and there to give their portfolios minor touch-ups, the trader said.

"I was talking to another trader at another firm...and we were saying the same thing," the trader said. "Stuff is sporadic but there's definitely money to be put to work, but it's not hand over fist. Investors are more selective than they have been in the last few weeks.

"It's much more targeted I think in terms of what they're looking to do."

The market will probably pick up when 2010 rolls around, when interest-rate outlooks will be at the top of most investors' minds.

"There's really a lot of reorganizing and cash managing of what they're looking to do right now, and they will take a fresher look after the holidays on the growing possibility that we might see higher rates," the trader said.

Possible movers

The rest of the week could continue to be quiet, but a few events could give the market the occasional jolt of life, the trader said.

"You're starting to get into holiday party season," the trader said. "We do have the Fed announcement on Wednesday, as well as Fannie Mae, and we should get one more buyback, and you have the Treasury, which has one more round of issuance this month in twos and fives and so that could keep things a little choppy, so to speak," the trader said.

On Wednesday, Fannie Mae has a Benchmark Notes announcement on the calendar, although the market expects the agency to pass on any issuance.

"I think there's probably a slight majority that feels they're going to pass," the trader said. "If they do anything, they might reopen their five-years. If they do a new issue - and this is in order of probability - the possibility is of a new three-year. But I think they're more likely to pass given that they came earlier in the month with a two-year."

The Federal Open Market Committee will also wrap up its last meeting of the year on Wednesday, and the market will be watching for any changes in the Fed's stance on interest rates and other stimulus programs.

"No one expects anything to happen, but at the same time you get articles...that say even if they don't raise interest rates they may tighten other policies," the trader said. "As those rumblings get louder, we could potentially turn to the inevitable rate hike."

The Fed, through the Federal Reserve Bank of New York, is also expected to carry out another purchase operation this week. An announcement on that front could spark some trading, although the impact will probably not be very significant, the trader said.

"I would venture yes, we would see another buyback this week," the trader said. "But it's less of an impact that it was. If anything it's more residual in everyday trading. The outstanding float on certain issues is less now, so that it can be actually a little harder to carry out bigger trades."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.