Copying and distributing are prohibited without permission of the publisher.

Watermark

Agencies Rocked By Scandal, But Spreads Remain Firm

23 Dec 2004

Demand for agencies remained strong this year despite an ongoing investigation of Fannie Mae's books, as spreads remained stable amid a positive technical backdrop.

Demand for agencies remained strong this year despite an ongoing investigation of Fannie Mae's books, as spreads remained stable amid a positive technical backdrop.

The Office of Federal Housing Enterprise Oversight, the regulator for Fannie Mae and Freddie Mac, announced its investigation into Fannie Mae's accounting in September, causing spreads of Fannie Mae debentures to widen out by a basis point (BW, 9/24). However, despite the continuing headlines and last week's forcing out of Franklin Raines, ceo, and Timothy Howard, cfo, spreads have tightened up.

"Demand is still there even after the headline junk hit the tape," said Ralph Axel, government strategist at HSBC.

Agency spreads to Treasuries ranged from the mid-30 basis points to low 60bps this year, and widened and tightened in line with Treasuries, which is unusual. "Agencies historically have not been as lock-step with Treasuries," said Chad Puryear, senior agency strategist at Morgan Keegan. As of Dec. 22, Fannie Mae 10-years were trading at LIBOR minus one bp, the tightest since 2000.

Both agencies reduced their sales, leading trading volumes to drop 50%. "Liquidity has been hampered by the lowered issuance. Also, the range has been tighter, so [investors'] need and desire to move in and out of the securities is less," said Scott Graham, agency strategist at RBS Greenwich.

23 Dec 2004