Agency Debt Markets Priced And Ready For Fed Purchases
12/05 02:04 PM
NEW YORK(Dow Jones)--The Federal Reserve's decision to purchase debt from housing finance companies like Fannie Mae (FNM:$0.84,00$-0.03,00-3.45%) and Freddie Mac (FRE:$0.8397,$-0.0403,-4.58%) last week caused risk premiums on agency notes to plummet.
That will make for few fireworks Friday when the central bank initiates its first round of purchases since the market has already priced in the program.
The goal of these purchases is to reduce the cost and increase the availability of credit for the purchase of houses, according to the Fed.
"There may not be much of a reaction today but over the past two or three weeks, since the announcement was made, spreads on agency debt have come in by 60 to 70 basis points and that's pretty significant," said Ajay Rajadhyaksha, director and head of U.S. fixed-income strategy at Barclays Capital in New York.
Risk premiums on agency debt are tighter by two to four basis points on the short end Friday. Longer term debt is wider by three to eight basis points, however.
At the beginning of the $100 billion program, purchases will be mainly of fixed-rate, non-callable senior benchmark securities issued by Fannie, Freddie and the Federal Home Loan Banks.
For Friday's auction, Credit Suisse (CS:$24.2281,$-0.5319,-2.15%) strategist Carl Lantz estimates around $5 billion of the targeted one- to two-year paper will be sold to the central bank.
The Fed will most likely move to longer maturities in subsequent auctions, but started with this sector because it's the most prevalent on the dealers' books, Lantz said.
According to the Fed's data, dealers are net long $56 billion in agency coupon securities due in less than three years. By contrast, they have only $4.6 billion in paper six to 11 years out.
"We are talking about a market with lower net issuance going forward, so as a result, even a smaller-than-expected number should be enough to tighten the market," Rajadhyaksha said.
Friday's auction is scheduled for 2 p.m. EST, and will close at 2:30 p.m.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com
(Emily Barrett contributed to this report)
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12-05-081404ET
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