Agencies widen as market adds risk following State of the Union message, FOMC statement

By Kenneth Lim

Boston, Jan. 26 - Agency spreads widened slightly on Wednesday as investors sought riskier assets and set up for possible supply at the front end of the yield curve.

Bullet spreads widened by about half a basis point on the day even as Treasury yields rose, an agency trader said.

"We had the State of the Union last night, so we came in into better selling, which kind of filtered into spread products," the trader said. "Agency spreads widened about half a point earlier today, then the [Federal Reserve] came out and really didn't say much."

Callables saw high issuance volume in terms of the number of deals sold, but average deal sizes were small, the trader said.

"I'm looking at the new issue screens and they're printing them hand over fist, but a lot of that is going to regions," the trader said. "[There are] a lot of smaller deals. Guys are not running out and taking billion-dollar deals as they may have six or 12 months ago."

Certainty brings activity

Trading volumes finally picked up after a quiet week, as the market got past two major pieces of uncertainty - the president's State of the Union speech Tuesday evening and the Federal Open Market Committee's January meeting statement on Wednesday afternoon.

"It's been a decently active day," the trader said.

In his address, president Barack Obama announced plans for a partial budget freeze targeted at discretionary, non-defense spending. Speculation about the freeze picked up on Tuesday before the speech, and Wednesday's early sell-off was seen as a slight pullback from the initial knee-jerk enthusiasm.

On Wednesday afternoon, the Fed's policymaking body also said it would maintain its interest rates policy and its $600 billion quantitative easing program of buying Treasury debt. Keeping to the status quo was a mild disappointment for investors, who are increasingly worried about inflation. There was some buying after the Fed statement came out, but most of the purchases were in the more sensitive parts of the yield curve, around the six- to seven-year sectors, the trader said.

"Not a heck of a lot of reaction," the trader said. "There was a bullish bent to it, and the market rallied a little bit just after the news, but then that was met by better selling."

Front-end offering expected

The front end of the yield curve came under slight pressure on Wednesday in anticipation of a possible offering of Benchmark Notes from Fannie Mae, which has a calendar announcement on Thursday.

"The short end seems like there was a bit of set-up trade with Fannie Mae tomorrow," the trader said. "The market looks like it expects tomorrow that if they do come it will be a new three-year. I saw some activity in that sector today."

If Fannie Mae does not issue three-year notes, it could pass or come with a small reopening of its February 2013 notes, the trader added.

The Fannie Mae announcement and the Treasury's auction of seven-year debt will be the main highlights for Thursday, and traders are hoping that the supply will help drive volumes higher in what has been a lackluster week.

"It's been a very quiet week," the trader said. "There's been fits and starts, but for the most part it's been sporadic at best."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.