Agency Spreads
October 15th, 2008 3:23 pm | by John Jansen |Agency spreads widened significantly today. Spreads in the 2 year sector are wider by 25 basis points. Five year sector spreads are wider by 14 basis points and ten year sector benchmarks are wider by 11 basis points to 12 basis points.The movement versus swaps has been dramatic. The spread to swaps in the 2 year sector is illustrative of the miasma in which this paper is now mired. For as long as I can recall 2 year agencies have traded rich to swaps. They were always and forever Libor less something. (Please correct me on that if I am wrong.) There was a natural constituency for this paper in the central bank community, especially as the central banks experienced a surfeit of reserves which needed a home. So the not quite explicit backing of the Treasury attracted a crowd of buyers.
By way of exaggerated example, the 2 year agency actually traded at Libor less 50 basis points when swap spreads were gapping out as Lehman Brothers or AIG passed into financial oblivion. (I do not recall the precise debacle but it was mid September.) Anyway, 2 year agency paper trades as we speak at Libor +12ish. That is an amazing 60 basis point move in about a month.
The problem is that the umbrella of protection for bank debt in the recent series of initiatives is perceived to be impermeable while the similar still not quite explicit umbrella for the GSEs is seen as a bit leaky.
4 Responses to “Agency Spreads”
By barry on Oct 15, 2008 | Reply
Not sure for the reason, but the Agencies have become the dumping ground for Wall Street’s toxic waste.
Changing the asset composition to include potentially $100 billion in toxic waste doesn’t augur well for bond holders especially if the full/faith credit is only for 3 years.
By Bond newbie on Oct 15, 2008 | Reply
Barry, the bank debt guarantee is only 3 years. The agency one is as long as the conservatorship (so basically perpetual).
JJJ, I disagree that the agency guarantee is “leaky,” esp. compared to the FDIC guarantee. Do they want Paulson to have a press conference where he plays Finance 101 professor, identifying arbitrage opportunities? Won’t happen, because he *needs* a lower funding cost in Tsy notes to be able to effectively buy up MBS debt.
To quote Treasury describing its “leaky” agency debenture guarantee:
“Does the senior preferred stock purchase agreement protect debt and mortgage backed securities issued or maturing after 2009?
Yes. The holders of senior debt, subordinated debt, and mortgage backed securities issued or guaranteed by these GSEs are protected by the agreement without regard to when those securities were issued or guaranteed. Debt and mortgage backed securities issued or guaranteed both before and after December 31, 2009 are protected by the agreement. ….
…Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law would be inconsistent with the U.S. government’s longstanding history of honoring its obligations. Such action would also give rise to government liability to parties suing to enforce their rights under the agreement. ”
Source:
http://www.treas.gov/press/releases/hp1131.htm
By Rob on Oct 16, 2008 | Reply
I beleive there was an unintended consquence of make agencies ” lees secure” than bank paper as the Gov’t, though authorized to inject up to $200 billion in capital in them if need be, never really explicitly guaranteed their debt. This has caused selling of agencies to buy, what is now seen as better backed, bank paper.
Don’t be surprised to see the govt come out with a more explict backing if they really want martgage rates to come down.