Agency trading volumes have recently been averaging about $15 billion a day, or half of the $30 billion in daily volumes in 2002 at a time when agency issuance was much higher. Although trading activity has been dropping since then, the pace has intensified of late because of lower projected new sales for this year.
In a counterintuitive surprise, agency traders are still offering tight bid/offer spreads even though lowered volumes would suggest otherwise, according to Gerald Lucas, head of Treasury and agency strategy at Banc of America Securities. "Dealers are offering more liquidity than justified by declining volume," he said. He declined to give examples of bid/offer spreads as they vary widely in issuance and size.
With Fannie Mae and Freddie Mac expected to each issue less long-term debt than their much smaller sister agency the Federal Home Loan Banks (BW, 1/10), many relative value investors have cut their agency trading because of the lack of depth and the danger of being squeezed in the repo market, Lucas said.
Despite falling volumes, market participants say agencies have still not approached corporate bond levels of illiquidity. "You have to keep [reduced issuance] in perspective. A few years ago, Fannie Mae had the largest nongovernmental issuance in the world," noted one trader.
