Agencies close mixed as Treasuries fall; investors crowd sidelines before Bernanke speech

By Kenneth Lim

Boston, Oct. 14 - Agency spreads ended mixed on a quiet Thursday as Treasuries fell on a weak auction of 30-year bonds.

Bullet spreads widened by about 0.5 basis point in five-year and shorter sectors while tightening by half a basis point in sevens and longer.

"Agencies kind of took a back seat to Treasuries today," a government bond trader said. "Spreads were mixed...Treasury auctions were pretty bad this week. Some people were holding back to see what [Federal Reserve chairman Ben] Bernanke says tomorrow."

Spreads had tightened on Wednesday, and the market was taking a pause to see if the narrowing was justified.

"It's been a really slow week, so it's actually hard to get a good picture of the market," the trader said.

Trading volumes remained thin on Thursday, said Wall Street Access trader Michael Skinner.

"[It's] very quiet for us here today," he said. There's "a little bit of two-way flow. Spreads have tightened the last couple of sessions. Some guys took advantage of it, and some guys thought if there's going to be another round of [quantitative easing] it could tighten further."

Callable issuance was up on the Treasury selloff.

Skinner said he saw a "good deal of new issues today on the tape," mostly because the Treasury market sold off. "When the Treasury market sells off you see better coupons."

Treasuries retreat

Spreads have tightened slightly on the week because of the recent decline in Treasury prices, Skinner said.

Treasuries have struggled over the past week as the government's auctions of three-, 10- and 30-year debt were met with poor demand.

"The theme lately has been as Treasuries sell off, agencies tighten," Skinner said. "Using five-years as my focal point, we've tightened about 7 or 8 bps over the past two weeks or so."

Agencies have also been outperforming swaps, Skinner said.

"We're outperforming swaps," he said. "Today swaps were out a little bit, so we have outperformed swaps."

Bernanke speech ahead

The market will probably stick to the same spot on Friday, Skinner said.

"I can't see things changing too much tomorrow," he said.

The September Consumer Price Index is Friday's major piece of economic data. Bernanke will also be giving a speech to the Boston Fed and could discuss the central bank's view on new monetary stimulus.

But the government bond trader did not expect Bernanke to tip his hand so early.

"I doubt he's going to have anything substantial to say about QE tomorrow," the trader said. "But there could be segments of the market that will be looking for an excuse to buy anyway because of the selloff."

Skinner said agencies would probably benefit from any Fed buying of debt even if the central bank focuses only on Treasuries.

"They will be a beneficiary as Treasury yields get driven down," he said. "Spread products should perform well, because people will be searching for yields."

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