Agencies mixed as Treasuries dip on supply; market expects Fannie Mae to tap front end

By Kenneth Lim

Boston, May 10 - Agency spreads closed mixed on Tuesday, with the front end performing slightly better on a long-awaited rise in Treasury yields.

Versus Treasuries, bullet spreads on the whole closed the day mostly unchanged, an agency trader said.

"In general I'd describe it as unchanged," an agency trader said. "Agencies were mixed to swaps, firming in the front end."

The callable market also saw issuance pick up as the day's higher yields allowed dealers to print more attractive coupons.

"I think there was some interest today as the market backed up and you got a bit more attractive yields," the trader said. "If you're at 2.96% the last three days, and it backed up a nickel today, 3% becomes possible, so there were guys taking small deals down."

Bargain hunters find opening

Buying in the front end of the yield curve picked up on Tuesday on the back of a drop in Treasury prices, the first down day for Treasuries in almost two weeks.

"Yields bogeys have been hard to find, so the front end has suffered as a result," the trader said. "We saw buyers today as yields backed up a bit. The back end saw a bit of selling because there was a slight overhang from a large customer program, but the belly hung tough."

Treasury yields rose on Tuesday as the market built in a concession ahead of auctions of 10- and 30-year securities over the next two days. A $32 billion auction of three-year Treasury notes on Tuesday drew decent demand with bids for 3.29 times the amount of notes offered.

There was some selling in 20-year bullets of around $200 million to $300 million that put pressure on long paper. At the same time, 30-year swaps widened by about 1.25 basis points, pulling on agency spreads as well.

But the trader said selling in the long end of the curve is not a concern, and widening of a couple of basis points should be an opportunity for buyers. That optimism is based on the lack of supply in the long end of the curve, with most agencies issuing in the two- to five-year sectors at the moment.

"There has been very little supply on the Street on that product, and they're not going to add to that supply," the trader said.

Fannie Mae on the clock

The market is expecting Fannie Mae to announce a two- or three-year offering of Benchmark Notes on a calendar slot Wednesday, the trader said.

"We're awaiting Fannie Mae tomorrow," the trader said. "We're expecting a front-end deal."

Fannie Mae passed on its May 3 opening, and its next calendar slot is on June 14. The agency has not issued new Benchmark Notes since March 2.

"They had two days within a week of each other and they passed last week," the trader said. "I think it was a courtesy to the fact that they had to announce earnings last Thursday."

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