Agency Debt
December 3rd, 2008 4:14 pm | by John Jansen |Dealers expect that the Federal Reserve will notify them tomorrow that the Federal Reserve will purchase agency paper on Friday. The process will be conducted through the primary dealer network about once a week. The Federal Reserve will purchase fixed rate non callable senior debt.Spreads today were mixed. Two year spreads narrowed 2 basis points while 5 year and 10 year spreads were about 5 basis points wider. One trader with whom I speak felt that the underperformance of the 5 year sector and 10 year sector was a result of profit taking following the recent spread improvement.
The trader with whom I spoke mentioned one glaring anomaly in the agency market. On the run benchmarks trade at huge premiums to off the run issues. As an example the 3 year FNMA trades at T+130 while an issue three months shorter trades at T+160.
Dealers are long off the run paper and short the on the run and this results in a never ending bid for the on the run issue.
