Bid/offer spreads on 10-year agency bonds may widen and the current squeezes on five- and 10-year paper may increase as agency issuance continues to fall. Bid/offer spreads in the 10-year sector could widen another quarter of a basis point as short-term investors are increasingly showing reluctance to dabble in a shrinking market, according to K.N. Sundararajan, agency strategist at Barclays Capital. Trading volumes have halved from 2002 (BW, 3/7).
Bid/offer spreads have already widened up to half a basis point more than they were last year for 10-year agency paper. Sundararajan foresees even more widening as Fannie Mae and Freddie Mac continue to shrink their retained portfolios, which may cut agency issuance by $17-18 billion this year, he estimates.
Reduced issuance could mean an increase in squeezes on five- and 10-year paper. Sundararajan forecasts Fannie Mae will not issue a second 10-year this year and Freddie Mac may issue just one more in the third quarter. He declined to speculate how much squeezes would increase in the second quarter, or which issuances might be affected, but pointed to the Fannie Mae 3 7/8%s of February '10 and the Freddie Mac 3 3/8% of April '09 as recent examples of squeezes.
