Agencies widen on thin volumes despite late index trading; Freddie Mac issuance in focus

By Kenneth Lim

Boston, Aug. 31 - Agency spreads widened slightly on Tuesday as the market ended the month on a down note.

Bullet spreads expanded by about 0.5 to 1 basis point across the yield curve on light volumes.

"Spreads are a touch wider today," said Michael Skinner, an agency trader at Wall Street Access.

Trading volumes were weak with the long Labor Day weekend looming just around the corner.

"It's pretty quiet today," Skinner said. "I can't tell you it's been terribly active."

Callable issuance was also quiet, with benchmark-sized bullet issues capturing most of the attention on Tuesday.

"Whatever callables you see typically are step-up deals," Skinner said. "There was a small [Federal Farm Credit Banks] auction, small [Federal Home Loan Banks] auction, but other than that there wasn't much going on."

Month-end indexing

Despite the overall quiet session, bullets across the board saw a slight uptick in activity on the back of month-end trading.

"There was some stuff done due to month-end indexing," Skinner said. "I had a couple of accounts come in to look at some issues across the curve. The rebalancing has been the highlight of the day."

Freddie Mac will announce on Wednesday whether it will issue any Reference Notes this week. An offering of new two-year notes or a reopening of an existing three-year series would be the likely choice if the agency decides to issue, Skinner said.

But the mortgage agency could choose to pass as well.

"They have another announcement next week," Skinner said. "Given the lack of liquidity in the market now, I wouldn't be surprised if they passed."

Negative end

The agency market ended August on a widening note despite some early tightening, Skinner said.

"At the beginning of the month they tightened considerably, but in the last week or so they gave everything back," he said. "When Treasuries are rallying like they have this month, which I believe is one of the biggest months for Treasuries since 2008, spreads tend to trail, even though agencies are considered Aaa."

Agencies could also be seeing the start of some tentativeness among investors because the White House is expected to unveil a plan for the future of Fannie Mae and Freddie Mac by January.

"I think people also have, at the back of their minds, the fact that sometime in the next six months they're going to have a new plan for Fannie Mae and Freddie Mac," Skinner said.

The rest of the week could be busier than the typical pre-Labor Day period because of Friday's non-farm payrolls and unemployment reports.

"I think next week will be more active...but we might be keeping guys in their chairs over the next day or two because of the unemployment and jobs data," Skinner said.

© 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.