Agency spreads are unchanged in the 2 year sector and a basis point tighter in the 5 year sector. Ten year spreads are a basis point wider.
Federal Home Loan Bank priced a 3 year note today at T+35. This issue has not budged and is 35/34.5.
One analyst with whom I speak regularly thinks that notwithstanding the tightest spreads in two years, the risk is that spreads move tighter from here.
There is very little supply and Freddie Mac has engaged itself by buying back debt. The GSE has purchased floaters and subordinated paper thus far. One analyst suggested that Freddie might be involved shrinking its balance sheet as mandated by the conservatorship agreement when the wheels fell off the GSE bicycle last September.
The conservatorship agreement stated that Freddie would begin to reduce its balance sheet by 10 percent each year beginning in 2010. Here is a paragraph from the statement which then Secretary Paulson issued last September as FNMA and Freddie Mac were passing into financial oblivion and redundancy:
“To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.”
Anyway,one observed thinks that the “unwinding” might be underway as we speak.