Agencies outperform on yield grabs; long maturities gap tighter as Treasury curve steepens

By Kenneth Lim

Boston, Oct. 7 - Agency spreads continued to tighten Thursday on another wave of buying as investors sought value amid falling yields.

Bullet spreads narrowed versus Treasuries and swaps with volumes picking up.

"It was a busy day in agencies and a crazy day," said Mike Goldman, head of agency trading at Guggenheim Partners.

Trading activity was brisk amid enthusiasm as the belly of the curve rallied on Wednesday, Goldman said.

"Five-year Fannie Maes closed at +34 bps on Tuesday, went to 33 bps bid at the close yesterday, now they're at 29.5 bps bid, so they were 3.5 bps tighter today."

Longer-dated callables saw better interest with 30-year Treasury yields backing up, another trader said.

"Investors are desperate for yields, and long callables are about the only place you can get them now," the trader said.

Long maturities improve

One of the best performing sectors on Thursday was in 20-year paper.

Long-dated 30-year Treasuries have been under pressure ever since the Bank of Japan intervened to devalue the yen. Long agencies, which are mostly 20-year maturities, are measured against 30-year Treasuries, so they can tighten dramatically when 30-year Treasury yields surge.

"There's been relentless steepening on 10s to 30s," Goldman said. "30-year agencies are really 20-year agencies, so if the curve steepens, they trade better against 30s. The 30-year agencies, which are in fact 20-year agencies, gapped in 4 bps to 5 bps today versus 30-year Treasuries."

Two-year agency spreads did not move as much on Thursday, but that was only because they have been improving over the past few days. Fannie Mae's new 0.5% Benchmark Notes due October 2012 were last seen at a spread of about 11 bps bid, 10 bps offered, which is about as tight as the market will allow.

"There's nothing left in them," Goldman said.

Investors are largely expecting the Federal Reserve to announce a new round of quantitative easing, which put pressure on agencies last week because the Fed will probably buy Treasuries instead of agencies. But as absolute yield levels drop, that earlier widening was seen as an opportunity for bargain hunters.

"With everybody expecting QE2 that should widen agencies," Goldman said. "But now they've just reached a point where people perceive the value and there's a lot of real money buying."

The hunt for yields and the outperformance of agencies has raised interest in the market.

"A lot of people got re-energized," Goldman said.

Quiet Friday ahead

The market could quiet down slightly on Friday ahead of the long weekend, Goldman said.

The Labor Department's employment situation report will be closely watched, but most of the trading related to the payroll numbers will be in Treasuries.

"Typically employment days are slow for agencies," Goldman said. "There are more things going on in the curve...maybe we'll see some trading before 10 a.m., but after that people will start to think about the weekend."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.