Agency spreads widen amid turbulent Friday as Treasuries rally; trading volumes stay weak

By Kenneth Lim

Boston, Feb. 5 - Agency spreads widened on Friday to end another soft week as Treasuries rallied on early weakness in the stock markets.

Bullet spreads widened by 1 to 2 basis points across the yield curve, an agency trader said.

"I think Treasuries came up strong during the day because of a lot of concerns about the domestic economy and lingering fears about supra-sovereigns, so we did see some flight to quality and agencies were not able to keep up," the trader said.

Trading volumes remained slow as buyers remain wary at the moment, the trader said.

"Not a lot of volume today," the trader said. "I think it's a case of some investors looking elsewhere, at supra-sovereigns, for example, for better yields and some investors holding out because they expect spreads to widen a little more."

Christopher White, senior vice president of fixed income sales and trading at Moors & Cabot Capital Markets, said most investors were distracted by what was happening in the equity markets, with the Dow Jones Industrial Average falling below 10,000 before staging an afternoon comeback to end at 10,012.23.

"Today a lot of people were focused on what was happening in the afternoon market," he said.

Callable issuance was decent, with the largest deals coming from Federal Home Loan Banks on a roughly $300 million TAP offering and a $300 million Fannie Mae issue, White said.

Slow week

Interest in the agency market was weak over the past few days, White noted.

"For the past two days you've seen pretty light trading," he said. "You had commercial banks selling on the long end of the curve and regionals and bank managers buying on the two- to three-year part of the curve."

"Discount notes have traded at the same levels basically the past two days," he continued. "You've seen spreads widened out a little bit just because of the rates rally."

The week ahead has Freddie Mac on the calendar for a possible issuance of Reference Notes on Feb. 10, while FHLB could issue a week later, White added.

"The expectation for both will be something in the front end," he said.

Afternoon reversal

The markets in general had a mixed session on Friday, beginning with an ambivalent non-farm payrolls report, the agency trader said.

"Payrolls was kind of mixed," the trader said. "On one hand unemployment is down, but on the other hand the number of jobs also fell. It's like is the cup half empty or half full? The market can't go anywhere with something like this."

White said there was also a "little bit of fear trading" early Friday on the back of concerns about the weak credit health of some European countries. But those concerns seemed to reverse course some time in the afternoon, giving the markets a roller-coaster ride to end the week.

"This morning there was a deflation trade, people buying Treasuries, selling oil, gold and equities, and then as the day progressed we saw that reverse a bit, where the stock market is now basically even, oil was down a little and gold was actually higher," White said. "It's like a tale of two cities."

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