The 30-year agency sector is trading tighter than swap spreads for the first time in four years, because of positive technicals for longer-dated triple-A paper and in an indication investors expect tighter regulation of the government-sponsored enterprises to become a reality. Although there has been a broad surge in demand for long paper as part of pension plans better matching assets and liabilities (BW, 2/7), Larry Dyer, agency strategist at Credit Suisse First Boston, believes the tightening has more to do with GSE reform gaining steam. "Agency spreads have been under pressure as people worried about political risk. Spreads are grinding tighter because today we're much closer to having a stronger regulator that would make bondholders more comfortable," Dyer said.
As of Feb. 22, 30-year Freddie Mac paper was trading two basis points through swaps, while 10-year agencies were trading 5-6bps through swaps. About six months ago, 30-years traded 20bps over swaps and 10-years traded 10bps over swaps.
William Prophet, interest-rate strategist at UBS, said several factors are at work: investors becoming more comfortable with the GSEs despite headline risk, investors reaching further out the curve for yield and the general lack of supply. "It's rare for the agencies to even issue a 10-year now," he said.
