Agency spreads tighten on the short end; Freddie Mac takes a pass; Bernanke still biggest news

By Lisa Kerner

Charlotte, N.C., Aug. 25 - Agency spreads ended Thursday tighter, according to a trader, who noted there were several news items that took focus away from the market.

The two-year sector was "a good" 2 to 3 basis points tighter, while the three-year sector was in about 3 to 4 bps. The five-year sector moved in 1 bp.

Freddie Mac's announcement that it will forego its Reference Note issue this time around caused some market and spread readjustment, the trader said. The agency's next calendar slot is Sept. 14. On Wednesday, at least one trader was looking for the agency to issue a Reference Note somewhere in the range of $2 billion to $4 billion.

Also causing market readjustment were a pair of unrelated announcements, said the trader. Warren Buffet's Berkshire Hathaway, Inc. is investing $5 billion in Bank of America preferred stock and Steve Jobs resigned as Apple Inc. chief executive officer.

The threat of Hurricane Irene's hitting the East Coast this weekend is causing concern, and there continues to be "trepidation" regarding the unsettled economic situation in Europe, the trader added.

The biggest concern continues to be Federal Reserve chairman Ben Bernanke's speech on Friday at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyo.

According to the trader, that has been a focus since he came into work on Monday.

There was "a ton" of buying, with $25 billion of callables redeemed this week. Investors are sitting on the fence now, he said.

"Dealers are reluctant to move prices, thinking we are going to get a bounce," the trader said.

While there is more paper to be bought, the fickle market seems to be taking a breather.

Regarding what he hopes to hear from Bernanke on Friday, the trader said anything other than QE3 would be a bit of a disappointment.

Absent QE3, he said, the question will become which market gets hit the hardest?

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