Agencies narrow on month-end, extension trades as Treasuries rally; Freddie Mac passes

By Kenneth Lim

Boston, April 28 - Agency spreads tightened slightly on Thursday on a flurry of month-end buying as Treasury yields fell.

Bullet spreads narrowed by about a 1 to 2 basis points versus Treasuries across the yield curve, an agency trader said.

"Today we did a bit better than we've been doing recently," the trader said.

Callables also saw decent volumes. Although new issuance was slow, dealers managed to clear most of their inventory from previous weeks, the trader said.

"The secondary stuff that looked cheap has cleaned up pretty well," the trader said. "You might think the levels stink, but the fact of the matter is the market's bidding for it."

Month end boosts bids

Investors on Thursday appeared to be trying to do as much of their trading as possible before the weekend, the trader said.

The main forces behind that urgency was the looming month-end as well as holidays in many international markets for May Day.

"We were busy with month-end," the trader said. "And tomorrow's going to be tricky with the Royal wedding [in London], Tokyo's off, and then you have Golden Week [in China]. Tomorrow's going to be the last chance to get some stuff done."

Agencies also saw some extension trading as investors moved out on the yield curve to pick up better coupons in the four- and five-year sectors from the richer two- and three-year sectors.

"Two-to-threes are not as rich as they were a couple of weeks ago, but they're still very rich," said the trader, adding that investors were finding better value a few years out on the curve.

Buyers were encouraged by a rally in Treasury prices, which made room for agency yields to also fall.

"I think with the Treasury market rallying today, some people said at these levels agencies looked interesting," the trader said.

Freddie Mac skips issuance

Freddie Mac on Thursday decided to forgo its issuance calendar opening for offering Reference Notes.

The agency's next slot is on May 19.

"We had Freddie Mac on the docket today and they passed, but it was not exactly a big surprise," the trader said.

The supply pipeline could reopen again soon with Fannie Mae scheduled to make an announcement on May 3, but hopes are not high for a big deal after the weekend.

"They have two supply windows next month, so they may pass on the first one and use the one on the 11th," the trader said.

Funding levels are more attractive in the three-year sector than in the two-year sector, the trader added, but trying to raise money by issuing bullets is still not optimal for Fannie Mae at the moment.

"Their funding needs are light, and they're getting so much better execution in the callable market," the trader said.

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