Agencies narrow as Treasuries slip lower; market eyes Freddie Mac issuance, FOMC minutes

By Kenneth Lim

Boston, Jan. 3 - Agency spreads got off to a positive start on the first trading session of the year, narrowing on the back of weaker Treasuries.

"We had a strong performance today," said Michael Skinner, an agency trader at Wall Street Access. "We had December, which was kind of a crazy month in general and in agencies...and today was somewhat of a return to normalcy."

Bullet spreads tightened by about 3 to 4 basis points in the 10-year sector versus Treasuries on Monday and were also narrower in other parts of the yield curve, Skinner said.

"Agencies outperformed swaps and Treasuries," he said.

Callable issuance was slow to return from the year-end lull.

"I can't say I see a lot more buying yet, but there's a better tone in the market," Skinner said.

Freddie Mac, Fed minutes ahead

Freddie Mac will make the year's first issuance calendar announcement, and the agency is not expected to offer much in the way of surprises.

"Either the front end or a pass," Skinner said.

This year could be another lackluster year for the primary market, with most market commentators predicting a slowdown in issuance from the government-sponsored enterprises. Putting real pressure on issuance volumes is the government's requirement for Fannie Mae and Freddie Mac to reduce the size of their portfolios.

"I personally don't see them cutting 25% in one year, but a gradual reduction every year, I think that's what you'll see," Skinner said.

Fixed income investors will also be keeping an eye out Tuesday for the Federal Open Market Committee's minutes from its December meeting.

The market wants to see if there was any dissent within the central bank's decision-making body, thoughts on quantitative easing and views on the economy, Skinner said.

"All eyes will be on the language," he said.

GSE future in focus

For the rest of the week, non-farm payroll data on Friday will be the major economic highlight.

"It's going to be a pretty busy week," Skinner said. "The Treasury market's obviously what's setting the tone for the agency market, and I still see bonds swinging 1.5 points at a time, so on the whole the market is still a little choppy."

The future of Fannie Mae and Freddie Mac is also hanging over the market, with the White House expected to address the issue by Jan. 31.

While lawmakers are widely expected to delay making any major changes about the housing agencies while the economy is still in a fragile state, the next few weeks could hold some headline surprises, Skinner said.

"There's going to be some talk about where the future is going to be, so we could see some tape bombs," he said. "But I don't see anything changing significantly."

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