Agencies tighten with swaps; market reins in risk aversion ahead of new Fannie Mae supply

By Kenneth Lim

Boston, July 6 - Agency spreads tightened on Tuesday as the market followed swaps tighter across the yield curve.

Bullet spreads closed about half a basis point narrower in the two-year sector, while 10-year spreads came in by about 1 bp. Five-year spreads tightened early Tuesday but "leaked a little" in the afternoon, said Gleacher & Co. trader Craig Ziegler.

"Swaps tightened across the curve, and agencies followed swaps tighter," he said. "Swaps were tighter about 2 bps in the front end and 1 bp in the back end."

Callable issuance was decent, although deal sizes were mostly on the small end of the spectrum, with a couple of TAP openings by Federal Home Loan Banks.

"They traded OK; they traded better," Ziegler said. "There wasn't any kind of large deals."

Most of the activity in callables was in the two- to five-year area for straight callables, while step-ups saw more action in the 10- to 15-year range.

Trading volumes, however, remained thin coming out of the holiday weekend.

"Bored," Ziegler said when asked to describe the mood in the market. "The problem is the absolute yields in the Treasury market are exhausting potential buyers."

Confidence correction

The market was reining in some of the extreme risk aversion that took place during the previous week, another agency trader said.

"There was nothing but bad news last week, and with the holiday and all, there wasn't a lot of liquidity so things got a little exaggerated," the trader said. "I think people had some time to think about it and today spreads across the board came in a little."

Monday's tightening was more about the rest of the fixed income markets catching up with Treasuries than it was about people leaving Treasuries, the trader added.

"Demand for Treasuries is still very strong," the trader said. "But I think some of the spreads that occurred over the last two weeks just weren't going to last."

Fannie Mae ahead

Fannie Mae could announce a two- or three-year offering of Benchmark Notes on Wednesday in a calendar opening, Ziegler said.

"Everyone's looking for a reopening of two- or three-years or maybe a new three-year," he said. "I guess the news would be welcome."

The other trader was also expecting a front-end offering and said he thought that agency spreads could see some loosening with the new supply.

"There's a lot of demand, but at the same time I think the market's really looking for some relief from the tight spreads," the trader said.

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