Agencies close flat as market plagued by weak volumes; Freddie Mac two-year notes expected

By Kenneth Lim

Boston, Jan. 31 - Agency spreads ended about flat on Monday as the market closed out the first month of the year still suffering from a drought in activity.

Bullet spreads ended mostly unchanged on the day, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"Agencies were kind of mixed today," he said, noting agencies "finished pretty close to unchanged, but [there were] good buyers in the five-year sector."

Another trader said callable issuance activity was decent, although a drop in coupon rates just before the weekend took some demand out of the market.

"We're still seeing good demand for step-ups," the trader said. "The only thing about step-ups is we're seeing a lot of deals but each deal is kind of small, so absolute nominal volume wise it's not great."

Uncertainties plague agencies

Volumes continue to be lackluster, as it has been for most of January, amid uncertainty about where rates are headed, the trader said.

"I think that's one of the biggest problems for the market right now," the trader said. "[It's] one of the biggest reasons why money is staying on the sidelines and not being put to work."

There does not seem to be any apparent end in sight in the near term for the market uncertainty, the trader added.

"There's just nothing on the horizon that you can point to and say, that's the thing that's going to reveal everything," the trader said. "Every week or every other week we're getting data that seems to go in two directions. We've got the tax cuts and [quantitative easing] going one way and the budget freeze going the other. Everything's pulling in different directions and nobody has any idea which side is stronger."

New issues, which predictably come at discounts, are the main driver of activity these days.

"That's the only thing that everyone knows how to play," the trader said. "You know it's going to come half to 1 basis point cheap, and as long as we're stuck in a range, that's probably as good of a discount as anything."

Freddie Mac ahead

Freddie Mac could announce an offering of new two-year Reference Notes on Tuesday as part of a calendar slot, Riley said.

"I expect a two-year out of Freddie Mac tomorrow," he said.

The other trader agreed that a front-end deal was likely from the agency.

"Five-years are probably a little too expensive right now," he said. "They don't really have a huge funding need there, so they can probably wait a little on that. We just saw a bunch of three-years, and their last one was a $6 billion three-year on Jan. 5, so I don't expect them to go there again. Two-years is probably what you're going to get or a pass."

The trader said demand should be good for whatever the agency chooses to issue.

"Like I said, the benchmark market's living and dying by new deals right now," the trader said.

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