Spreads close flat to slightly wider as market gyrates; market eyes front-end Fannie Mae deal

By Kenneth Lim

Boston, June 1 - Agency spreads came under slight pressure but ended mostly unchanged on Tuesday as uncertainty in the markets paralyzed investors.

Bullet spreads ended about half of a basis point wider in the two- and three-year sectors. Five-year and longer spreads closed unchanged to 1 bp wider on Tuesday.

"It was a very, very quiet day," said Mike Goldman, head of agency trading at Guggenheim Partners. "Spreads were maybe unchanged to a little wider at the front end."

Craig Ziegler, an agency trader at Gleacher & Co., said callable activity was also slow.

"Very light in callable land today," he said. "Not too many issues. There was only one issue in [Federal Farm Credit Banks], some [Federal Home Loan Banks] step-ups, but very quiet. Activity did pick up in callable in the late afternoon."

Volumes were otherwise extremely thin, which the traders partly attributed to lethargy after a three-day weekend.

Uncertain investors

The market also appeared to be trying to find its way as markets had an up-and-down day.

"In the morning, we opened wider with swaps on the news coming from overseas," Ziegler said. "We outperformed swaps at the end of the day, but most of the day we were pretty much keeping in line with swaps."

Investors sold spread investments early Tuesday as ongoing fears about Europe's debt crisis sent the euro to a low early in the day before relatively positive economic data eased concerns later in the day. But a drop in equities near the close created widening pressure again.

"You had the legs of a worse day than it was," Ziegler said. "But it was kind of not a market that was driven by direction. ... I think everybody was expecting something worse."

Fannie Mae ahead

Fannie Mae could announce a calendar offering of Benchmark Notes in the front end of the yield curve on Wednesday, both traders said.

"They've been consistently coming at the front end," Goldman said. "Or they could pass. ... I think it will probably be a pretty small deal."

Ziegler noted that Fannie Mae has some outstanding 1.5% Benchmark Notes due 2013 and 1.25% notes due June 2012 that could be candidates for reopening.

"My guess is they could reopen," he said. "The demand is all in the front end."

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