Agencies steady as market awaits Fed easing; GSE debt likely to be left out, analyst says

By Kenneth Lim

Boston, Nov. 2 - Agency spreads were unmoved on Tuesday with the bulk of the market stuck in a holding pattern ahead of Wednesday's Federal Reserve statement.

Bullet spreads were mostly flat in the two-year sector. Paper maturing in five years and longer widened by about 1 to 2 basis points versus Treasuries. Trading volumes were lower than average ahead of the Fed's statement.

"I think everybody's in a waiting mode," said Mike Goldman, head of agency trading at Guggenheim Partners. "But we've had pretty dramatic tightening over the last few sessions."

The callable market was slightly more active as the higher coupons offered by the structures attracted a little more interest.

There was "a little bit of business in callables," Goldman said. "People are reaching for yields."

Fed meeting ahead

Uncertainty surrounding the details of the Fed's coming statement, which is expected to reopen the central bank's debt buying program, continued to keep money on the sidelines on Tuesday.

The Street expects the Fed to say it will pursue a quantitative easing policy, but it remains to be seen how aggressive the central bank will be. The Fed will almost certainly seek to buy Treasury debt, but agencies could be left out of this round of buying, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

"I don't believe the Fed will buy agency debt," he said. "If they do, they'd have to buy too much of the market in order to have any economic impact."

The previous round of quantitative easing, which lasted for over a year and ended in March 2010, included agency debt and agency mortgage-backed securities. But some critics said that the Fed may have stayed too long in the market and affected the liquidity of the agency market.

Supply takes back seat

With the Fed statement occupying the top of investors' minds, the market was quiet on potential supply later in the week by Fannie Mae.

Fannie Mae is scheduled to make a calendar announcement on the issuance of Benchmark Notes on Thursday. In the previous week, the agency sold $8 billion of new three-year notes and $1 billion of reopened five-year notes.

"Fannie Mae continues to be hit by a lot more pragmatic problems than how much debt they're issuing," LeBas said.

Fixed income investors are mostly focused on Treasuries at the moment, LeBas added.

"Agencies are kind of on the backburner right now," he said. "Spreads are relatively stable."

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