Agencies end flat as market hesitates amid uncertainty; Fannie Mae could announce at front end

By Kenneth Lim

Boston, June 8 - Agency spreads closed flat to slightly wider on Tuesday as a nervous market avoided making a big move in any direction.

The market is also expecting Fannie Mae to announce an offering at the short end of the yield curve on Wednesday, when a calendar slot opens.

Bullet spreads initially tightened early Tuesday as Treasuries gave up some of their gains from Monday. But investors could not make up their minds about where the markets were headed, and agency spreads eased back out to finish the day flat.

"It was kind of a weird day," one agency trader said. "A lot of hesitation in the market because of what's going on in Europe and the stock markets."

Callable activity was robust as investors hunkered down into callable step-up structures, which are seen as defensive investments if rates go back up.

"Step-ups were pretty good," the trader said. "Volatility is up, people want to pick up a bit of yield."

The trader described the general sentiment in the market as "nervous."

"The market can't find any stability in either direction," the trader said. "You don't know if you should be long or short."

Constant monitoring

The agency market is taking its cue from the broader financial markets, and there is currently a lack of clarity across the board, the trader said.

But the trader thought that the flight-to-quality buying in Treasuries, which have driven spreads wider over the past few weeks, may be overdone, and Treasury and agency yields will come to a midpoint before trading in a range.

"Personally I think Treasuries are too rich, and they're going to come back out," the trader said. "The agency market hasn't changed very much in the past six months, and I don't think it's going to change very much for the next six months, so I think you're going to see agencies trading in a range for the rest of the year, as long as all this stuff in Europe is still going on."

Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co., said Tuesday's yields were only off slightly.

"It's not really a whole lot when you consider where we've come from," she said. "Markets are just continuing to monitor the sovereign debt situation and the movement in equities."

Hurley said the market wants to be long on agencies, but current positions are small.

"I think yesterday's sharp move upwards in prices, combined with Friday's large movement, caught a lot of people off guard, and I think a lot of people would like to be long at lower prices," she said.

Fannie Mae to announce

Fannie Mae could announce an offering on the short end of the yield curve on Wednesday, the trader said.

The trader said an offering of Benchmark Notes in the two-year sector or three-year sector could be possible, but the agency could also pass on the calendar opening.

"They just did a two-year last week, and their funding needs aren't big, so I could see them pass and then wait until July to issue again," the trader said.

Hurley said any offering by Fannie Mae will probably do well.

"I would expect that it's probably going to go well because most of the issues that have come up have done well," she said.

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