Agencies narrow further as Treasuries slip; market awaits supply, House hearing on GSEs

By Kenneth Lim

Boston, Feb. 7 - Agency spreads tightened slightly on Monday as the Treasury market continued its recent slide ahead of supply.

Bullet spreads closed about half to 1 basis point tighter versus Treasuries on Monday but eased slightly against swaps.

"So it really depends on what benchmark you're using," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

Part of the outperformance versus Treasuries came on the back of a poor week for government debt. Treasury yields rose for the sixth straight session on Monday.

The agency market had a relatively quiet session without significant interest coming out of Asia, he added.

"Much of Asia was on hold yesterday and today for the continuation of the Chinese New Year, so it was quiet from overseas," LeBas said.

GSE discussion ahead

The future of Fannie Mae and Freddie Mac will finally come into the crosshairs in Washington this week after being put on the backburners for most of the past year, with a House subcommittee meeting scheduled on Wednesday to discuss the issue.

While there is greater headline risk with the looming hearing, the market is mostly discounting the possibility of a major market mover.

"I think we're unlikely to see a significant conclusion from this week's Fannie Mae and Freddie Mac discussion," LeBas said. "There's some pressure from the right side of the aisle to wind down those two entities, but the only problem is Fannie Mae and Freddie Mac and Ginnie Mae are the only ones providing housing loans right now."

The preferreds of Fannie Mae and Freddie Mac have also gone up in price over the past month amid speculation that the agencies could take some action amid the legislative debates, LeBas added. Fannie Mae's series T preferreds, for example, closed at around $2.04 on Monday, versus about $0.91 two weeks ago.

The speculation, however, has not developed into anything more than a rumor.

There have also been mutterings that the Treasury Department could announce its delayed plan for the housing agencies this week ahead of the House hearing, but that has also not been confirmed.

"The Treasury Department is kind of quiet about these plans, and [Treasury secretary Tim Geithner] is overseas right now, so I'm not sure if that's going to happen," LeBas said.

Fannie Mae supply

Supply could be the other big theme for the week ahead, with the Treasury expected to sell $72 billion of three-, 10- and 30-year debt from Tuesday through Thursday.

Fannie Mae has a calendar announcement on the issuance of Benchmark Notes slotted for Wednesday as well.

The agency last sold $5 billion of new 1.25% three-year Benchmark Notes on Jan. 28.

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