Agencies narrow; Fannie Mae skips issuance to extend supply drought; lower yields draw buyers

By Kenneth Lim

Boston, March 24 - Agency spreads tightened on Thursday as a skipped issuance slot by Fannie Mae created what could be a month-long supply drought, while lower absolute yields attracted buyers.

Bullet spreads narrowed across the board, an agency trader said, with the three- to seven-year sectors coming in by about 2 to 3 basis points versus Treasuries. The longer end of the yield curve was also "creeping towards the tighter end of the range," the trader said.

"Spreads were in a lot today," the trader said.

Callable activity also picked up on the jump in coupon levels as Treasury prices fell.

"Good buyers in callables as well as we went to higher yields," the trader said. "A lot of buying all round."

The trader said some of the activity came from the upsizing of deals that priced on Wednesday, but the higher Treasury yields were the biggest source of interest.

"That fact that we've moved to higher yields is helping guys to come in to look at some deals," the trader said.

Fannie Mae passes

Fannie Mae said Thursday that it would not use its issuance slot to offer new Benchmark Notes.

The agency's next calendar opening is on April 20.

The news did not come as a big surprise for many investors, partly because Fannie Mae already sold $4 billion of five-year notes on March 2. But the market may have felt compelled to act because the issuance calendar will be empty until Freddie Mac's April 5 announcement date.

That would mean a month without benchmark supply for the agency market - Fannie Mae's March 2 offering was the latest one.

"Just knowing that the next supply isn't for two weeks, people were going, wow, there really isn't going to be any supply in the market now," the trader said.

Freddie Mac could even pass on April 5 simply because it does not appear to have significant funding needs.

"I could see Freddie Mac passing on the fifth as well," the trader said. "Then [Federal Home Loan Banks] is next on April 13. I think they're likely to do a new deal."

Positive forces

The prospect of a supply drought combined with higher Treasury yields on Thursday to keep spreads tight and buyers active in what was one of the week's more robust trading sessions.

"It's very spread supportive. ... It's a very good combination," the trader said.

But agencies are beginning to look rich versus Treasuries at the moment, the trader added.

"Agencies look a little rich to Treasuries right now," the trader said. "The two- to three-year sector is more fairly valued than fives to sevens. ... You'll see a little bit of inching of spreads tighter."

The trader said the final week of the quarter could also be missing some action from Japan, as traders there appear to have wrapped up for the month.

"The guys in Japan have already done a lot of the stuff they need to do by now, so I don't expect to see much from them," the trader said.

© 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.