Agencies close flat as Fannie Mae skips issuance; rumored GSE plan makes no market waves

By Kenneth Lim

Boston, Feb. 9 - Agency spreads ended unchanged on a quiet Wednesday as expected supply and regulatory headlines fizzled out.

Bullet spreads closed the day about flat from the previous session, although the two-year sector came in by about half a basis point after Fannie Mae skipped a calendar issuance slot.

"Today was very, very quiet," a trader said. "Yesterday we were 2 to 4 bps tighter on the sell-off, but today spreads didn't do anything. Fannie Mae did pass, but we've already come so far and so fast that it didn't really matter."

Callable activity was also slower following the surge on Tuesday, when a sharp rise in yields brought out the new issues that tried to take advantage of higher coupons.

"Today was really just guys working down what they brought yesterday or upsizing," the trader said. "We probably saw just two large deals today."

The threat of even higher rates might lead to some reluctance from investors to buy new callable paper in the immediate term, but that should allow dealers to work off inventories, the trader said. Issuance volumes in general should be taking the cue from absolute rate levels.

"I think callable issuance has been directional," the trader said.

Fannie Mae passes

Fannie Mae said Wednesday that it will not issue any Benchmark Notes in February, forgoing its only calendar slot for the month.

The agency's next issuance opening is on March 1.

The trader was surprised by the announcement, saying a three- or five-year had been expected, although other sources had speculated on Tuesday that the run-up in funding levels would turn off the issuer.

The general consensus on Wednesday was that Fannie Mae simply did not have the funding needs.

"They really don't need the money," the trader said.

The next possible benchmark issuance is on Feb. 15 with Federal Home Loan Banks expected to make an announcement.

"It's hard to calibrate right now...but Home Loans is probably due to do a two- to three-year," the trader said. "The market would like a five-year, but they're likely to do a two-year."

GSE debate shrugged off

Reports emerged Wednesday that the Treasury Department on Friday could announce a roadmap on the future of Fannie Mae and Freddie Mac by offering Congress three options.

The news came as the House of Representatives began a hearing to discuss the housing agencies, which have come under federal conservatorship.

The Treasury will propose that the government can either completely stop guaranteeing mortgages, offer only a limited guarantee in case of another crisis or offer a full government guarantee on mortgages, the reports said.

The options essentially run through the spectrum of options that have been bandied about before this week by market observers, and did not raise any eyebrows. Wednesday's House subcommittee hearing was also relatively calm.

There were "no fireworks out of that," the trader said.

Investors are now less concerned about possible "tape bombs" on the debate, the trader added.

"It doesn't look like it's going to have any impact," the trader said. "It's vague enough, and the timeline is as we expected, which is the next presidential cycle and even then the actual implementation could be years after that."

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