Agency spreads tighten slightly across the board; Freddie Mac fails to deliver new supply

By Lisa Kerner

Charlotte, N.C., March 9 - Agency spreads were ½ to 1 basis point tighter across the board on Wednesday, according to Joe Larizza, director, Vining Sparks, LP.

Larizza said there wasn't enough business to drive any particular sector "one way or the other."

Expected new supply from Freddie Mac did not come through. The agency announced it will not issue new Reference Notes this week.

Earlier in the week, traders said that while they expected Freddie Mac to announce a two-year or three-year issue, they were really hoping for a five-year issue.

The news that Freddie Mac took a pass did not surprise Larizza.

"It would have been a highly sought deal, especially in the five-year," Larizza said.

Freddie Mac also skipped its Feb. 24 calendar slot. On Feb. 2, it priced $4 billion of 0.75% two-year Reference Notes.

With no supply in sight, expect spreads to trend tighter, said Larizza.

Larizza predicts more issues will be called as rates come down. Agencies will have to re-establish debt and will issue new supply in some form or another.

Wednesday was another quiet day in a week that has had little activity. Larizza attributed the low volume to activity in the Middle East, which spurred investors to a "flight to quality."

"A lot of people are fearful what rates will do," said Larizza, who is seeing most investors in the short end, five years or less.

"A large portion of our business is in the three-year or less."

Overall the economy "seems to be doing better," Larizza said, noting the lack of inflation.

However, loan demand is down and banks are hesitant to write residential mortgage loans.

"There are signs that we will have higher rates. The question is when," he said.

Larizza believes that the Federal Reserve is going to have to start revising rates, not soon, but maybe by the end of 2011 or the beginning of 2012.

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