Agencies narrow, volume thin ahead of House debt ceiling vote; Fannie Mae skips issuance

By Kenneth Lim

Boston, July 28 - Agency spreads continued to nudge tighter Thursday on modest progress in the debt ceiling debate, while Fannie Mae decided to skip an issuance opening.

Bullet spreads narrowed by about half a basis point in three- to five-year sectors, with the two- and 10-year sectors closing unchanged.

"Spreads are in slightly," an agency trader said. "But otherwise there's not much color."

The callable market slowed to a crawl, with just over a dozen deals on the screens.

"With the debt ceiling, a lot of accounts are sitting on the sidelines," the trader said. "There were only 14 or 15 new issues today, maybe less than that."

Trading volumes were extremely thin as the lack of tangible progress on the debt ceiling stalemate dried up the liquidity tap.

Spreads fall back in

Thursday's tightening essentially brought the market back to where it was at the start of the week.

"Spreads widened out a couple of days ago and yesterday morning," the trader said. "But since midday yesterday spreads have been steadily coming in."

The market appeared reluctant to express any sizable move away from current levels because of the lack of clarity surrounding the debt ceiling.

The Republican-controlled House of Representatives was expected to vote Thursday evening on a Republican proposal to cut the deficit and raise the debt ceiling, but the vote was postponed after the markets closed. Even if the proposal had been approved by the House, it was expected to be blocked by the Democrat-controlled Senate.

"They're going to kill it in the Senate," the trader said. "[Senate majority leader] Harry Reid has no choice but to kill it, otherwise if it gets to [president Barack Obama]'s desk and he has to veto it, it's going to be a political disaster. I think it's a mess."

With both parties taking their own paths at this late stage, the market now expects a deal to be made, if any, only at the last moment. Without an increase in the debt ceiling by Aug. 2, the Treasury Department has warned that the country could default on its payments. And credit rating agencies have threatened to downgrade the United States if Congress cannot make an adequate deficit reduction plan.

Investors have been reacting by getting out of the market.

"Get light on inventory," the trader said. "We're seeing a lot of bids wanted for bullets, but people are skittish depending on the liquidity of the issue."

Fannie Mae skips issuance

Fannie Mae said Thursday that it will not use an issuance calendar slot this week to offer new Benchmark Notes.

The agency's issuance calendar reopens Aug. 16.

The move was largely expected by the market, given that the agency just raised $5 billion in three-year notes two weeks ago and the currently rich funding levels.

"With the volatility in the market and just based on the uncertainty, I think it's just a bad environment," the trader said.

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