Federal Reserve Chairman Alan Greenspan's remarks before the House Banking Committee last Tuesday sent agency spreads slightly wider for the week.
While stating that the government-sponsored enterprises - Fannie Mae and Freddie Mac - are "well-run institutions," he does not think they are invulnerable, mainly because of their low capital ratios. Those low capital ratios could create imbalances that lead to unexpected side effects.
These comments sent 10-year agency spreads versus swaps out three basis points before coming back in one basis point by market close Thursday afternoon. The results of Greenspan's comments were "fairly muted this time," according to Art Frank, director of mortgage-backed securities research at Nomura Securities.
"The 10-year agency did not have a real good week, widening versus swaps," he added. "There seemed to be a slight negative reaction as measured by the 10-year agency to the 10-year swap."
Similarly, mortgages also drifted outward versus the 10-year swaps. "Fannie Mae current coupon is now 65 over the 10-year swap rate and the three-month range is 53 to 68. So we look a little bit cheap versus swaps," Frank said.
Thirty-year mortgages also underperformed, widening by three to four basis points, while 15-years widened one to two ticks.
Throughout the week, trading in mortgages was relatively light, while swaps were slow in the beginning of the weeks and were more active by week's end.
However, Ginnie Mae Program II securities came in for the week, catching a bid from regional banks. "Ginnie II 8s and 8.5s were 19/32 behind Ginnie Is, and they came in on the buy to 15/32 behind," Frank said.
Fannie Mae Issuance
This week's $10 billion issuance from Fannie Mae is expected to be well-received. Preliminary data has Fannie Mae issuing at least $4 billion of new two-year notes, at least $4 billion of 10-year notes as a reopening of the benchmarks due June 2010, and approximately $2 billion of 30-year notes as a reopening of benchmarks due May 2030.
According to Frank, "We see it getting absorbed without moving spreads."
The 30-year notes should do well, because there is "plenty of long-term money" due to the Treasury's buyback of long-term debt. However, the original 10-year issuance is the most liquid of the three, and should do even better after Fannie Mae reopens it.
In other Fannie Mae news, the agency announced a $1.5 billion stripped mortgage-backed security backed by 30-year 7.5s. The issue is Trust 308.
Bid Lists Abound
Six bid lists also entered the market last week, totaling $122 million. Among them included a $6.1 million list from Credit Suisse First Boston 1997 C1 A1C series, a $25 million CSFB 1999 C1 A2 series and a $25 million Chase Manhattan/First Union 1999 1 A2 series.