Agencies narrow on bargain hunting after recent slack; quiet week ahead amid holidays

By Kenneth Lim

Boston, Nov. 22 - Agencies ended their recent underperformance on Monday to tighten versus Treasuries as buyers were finally persuaded to return.

Bullet spreads narrowed by about 1 to 1.5 basis points across the yield curve on Monday in the strongest session for the asset class in about a fortnight.

"Today was better for agencies," said Mark Noble, head of agency at MF Global. "Last week we had a pretty horrible week, but today we kind of snapped that."

Even the callable segment saw a pick-up in activity, particularly in the secondary. Secondary volumes had been muted over the past two weeks as yields rose and dealers struggled to move inventory.

There wasn't much in new issues, but there was good buying in secondary callables, Noble said.

Cheapness draws buyers

Monday's rebound came on the back of a week to forget for agencies, which fell steadily further from Treasury benchmarks during the period.

"It was even more so versus swaps," Noble said. "Versus swaps agencies had a massive underperformance."

Buyers probably felt that the widening had gone on for long enough to present some bargains.

"I think it was sold off quite a bit," Noble said. "There was some selling of Treasuries most of last week, and today guys were bidding into Treasuries. There are some pretty good yields right now...It's kind of a grabathon, grabbing yields."

Another government bond trader said the buying on Monday was not a surprise, given how much agencies had cheapened over the past week.

"There wasn't a really good reason for agencies to widen that much except for maybe a little bit of technical correction," the trader said. "We were right at the bottom of the range, you had Treasury supply this week, and last Friday there were signs of bottoming out."

Quiet week ahead

The week ahead could nevertheless see muted volumes, Noble said.

"It's going to be a tough week to get anything done," he said, noting that Thursday was a holiday for Thanksgiving and bond markets close early on Friday.

The other trader added that investors this week will be more focused on the Treasury market, if only because investors have some supply to look out for. The agency primary benchmark calendar is quiet this week, resuming on Nov. 30.

"You've got auctions this week after the last set did poorly, so a lot of people are watching this week's auctions very closely," the trader said. "Honestly agencies are kind of not the biggest thing for us now. Most of the action is going to be in Treasuries."

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