Agency spreads close flat as Fed meeting pushes investors to sidelines; Fed departure near

By Kenneth Lim

Boston, March 15 - Agency spreads treaded water on Monday as investors waited out the Federal Reserve Open Market Committee's coming meeting.

Bullet spreads ended the day unchanged, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

"It's really very, very quiet," she said.

Callable issuance was more lively, with step-up structures forming the bulk of the day's offerings.

"It's been heavy again today," Hurley said.

But secondary trading volume in general was extremely slow ahead of the Fed's meeting on Tuesday, Hurley said.

"Everybody seems to be on hold waiting for the Fed tomorrow," she said.

Fed meeting on radar

Investors are on the lookout for the Fed's decision on short-term interest rates and its agency and mortgage-backed securities purchase programs, Hurley said.

"I think people want to see if 'extended period' with reference to rates being low remains in the statement," she said. "The other thing people are looking for is whether the Fed is going to definitively reference that it's through, at the end of the month, in its buyback of agency and mortgage-backed debt."

Most of the market currently expects the Fed not to extend the purchase programs, which is to end by March 31, Hurley added. So if the Fed reaffirms that sentiment, the market will probably not have any strong reaction.

"I don't expect that to have a major impact on spreads," Hurley said.

Uncertainty ahead

But the Fed's impending departure from the agency market has investors concerned about how much demand there will actually be left without the past year's biggest buyer.

"Investors are definitely going to be watching as we enter the next month how the market's going to be without the buybacks," Hurley said.

The market is split on how spreads will be affected by the end of the Fed program, and the recent benchmark-sized offerings by Fannie Mae and Freddie Mac have not quieted the discussion despite drawing strong responses. Fannie Mae's $6 billion and Freddie Mac's $5.5 billion offerings of three-year notes in the past few weeks were the largest so far this year.

"They have gone well and they've been large deals and they've been benchmarks, so there's a lot of liquidity," Hurley said. "But I think that the issue is still out until we really see how long-term spreads are ultimately going to be impacted."

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