Progress towards tighter agency spreads has been slow, but it is still proceeding, from the looks of this chart. 5-year agency spreads peaked on Nov. 20th at 172 bps (intraday), and have since fallen to just under 60 bps. In a "normal" environment spreads should be 30 bps or less. Given that Fannie Mae is essentially in receivership, a spread of 60 bps is not all that bad, however. The U.S. government is essentially guaranteeing the debt, but who's to say the political winds won't shift? Investors willing to buy FNMA debentures for only 60 bps more in yield (2.5% vs. 1.9%) than Treasuries are showing a significant amount of faith in the government to honor its promises.
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