Agencies end unchanged after swaps-driven roller coaster; volumes struggle amid low yields

By Kenneth Lim

Boston, Oct. 21 - Agency spreads closed flat on Thursday after an uneven day that was led by the swaps market.

Bullet spreads ended practically unchanged on the day despite narrowing versus Treasuries earlier in the day.

"We had two days today," said Mike Goldman, head of agency trading at Guggenheim Partners. "We were tightening in the morning and then widening in the afternoon. Add it all together and we're unchanged on the day."

Callable issuance also remained slow amid the recent drop in rates.

"We didn't see a lot of callables," Goldman said. "Even those spreads are collapsing. As we get quieter and volatility comes in, those spreads come down further. A lot of people want to buy them at last week's coupons."

Low yields hit volumes

Trading activity remained sluggish, with only a handful of trades done in various sectors, and for most of Thursday the agency market was merely following swaps.

"When we follow swap spreads, it tells me that there's not a lot of flows," Goldman said. "The tendency is to mark them tighter with swaps, and once they move the other way, to mark them back out. If there's real buying, guys leave the bids and go buy some bonds."

Goldman blamed the extremely low yields for failing to draw investors away from the sidelines.

"Spreads are low, yields are low," he said. "People get sticker shock."

Slight tightening

The market is nevertheless heading into the weekend on a slightly tighter note.

"I think two weeks ago we had a big move, last week we consolidated at the same level, and this week we got tighter again," Goldman said.

The bigger issue for the market, and for traders, is that volumes are stuck in the doldrums. The outlook is not great for activity to improve by much, although the two-day Federal Open Market Committee meeting, which ends Nov. 3, could spice things up a little.

"With year-end approaching, I see no sign of improvement," Goldman said. "I guess if the [quantitative easing] announcement disappoints, rates could back up a little bit, and then you might see a bit of buying."

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