Agency spreads mostly flat as market seeks signs; trader sees small, short Fannie Mae deal

By Kenneth Lim

Boston, Sept. 14 - Agency spreads were unchanged to slightly wider on Monday as the market took a break from the previous week's tightening.

"The bond market probably got a little ahead of itself last week, it corrected a little today," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

Volumes were light, continuing the summer pattern of busier mid-weeks.

"Mondays and Fridays seem to be non-events lately," Riley said. "Spreads on agencies have been very quiet today. They're almost unchanged across the board."

Callables remain active with new issuance going at a healthy pace, Riley said.

"Callables are coming on a regular basis," he said. "A lot of that is driven by the fact that paper continues to be called. A lot of the issues that we brought in the last six months to a year are being called because rates continue to inch lower and lower."

Fannie Mae deal expected

Fannie Mae has an announcement on Benchmark Notes issuance slated for Tuesday, and the agency will likely do something on the shorter end of the yield curve if at all, one agency trader said.

"I think it's probably going to be something small, probably at the short end," the trader said.

"They might pass or just reopen one of the existing notes. Their funding needs are really small right now, not just Fannie Mae but Freddie Mac as well, and this is a theme that's been with us all year. It's going to be well received."

Rangebound, event-driven market

The rest of the week looks to be quiet with few events on the calendar that are expected to have a major impact on spreads and rates.

The trader said spreads could ease as accounts take profits from the previous week's tightening.

"I think if the market is watching for signs to sell after last week's rally," the trader said. "We're expecting quite a bit of volatility for the rest of the year and into the start of next year as investors deal with the ending of the Fed buybacks and the government's plans for the GSEs."

Riley sees a rangebound agencies market.

"I won't look for any dramatic change in spreads versus Treasuries," he said of the week.

The rest of the year will also be event-driven, but the market is slightly jittery about what those events will be, Riley added.

"What's got everybody concerned is we don't know what's going to take us out of the current range and which direction we're going to be going when we get out of the range," he said.

"Foreign demand remains very good, but I think that's one of the factors that's kept us in this range."

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