Agency spreads narrow amid strong issuance, more buyers; correction possible soon: trader

By Kenneth Lim

Boston, March 12 - Agency spreads narrowed Friday to end a positive week as strong issuance results gave fuel to buyers.

Bullet spreads closed about 1.5 basis points tighter versus Treasuries across the yield curve, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"We were a little mixed early on with the economic data that printed," he said. "The market took a hit and then came roaring back in the afternoon."

Callable issuance slowed down a little after a strong week.

"I don't think callable volume was that great," Riley said. "But you generally have a little less reverse inquiries on Fridays, so that doesn't really point to anything much."

Pent up demand

Investors who had been waiting on the sidelines to see how the week's supply would form were heartened after offerings by the Treasury and Fannie Mae did well, Riley added.

"Certainly most of the optimism came from the fact that we just went through the Treasury auctions and they went very, very well," he said.

A positive auction for 30-year Treasuries and a very well-received $6 billion offering of three-year Benchmark Notes by Fannie Mae on Thursday easily eased concerns about the market's ability to absorb large amounts of supply, Riley said.

"I consider agency and [Temporary Liquidity Guarantee Program] and Treasury paper if not the same asset class, but very similar asset classes right now," he said. "When you have something like $84 billion of Treasuries that trade on outstanding auctions, it sure tells the world that there's plenty of appetite out there."

Those sentiments brought the buyers out in droves on Friday, Riley added.

"It was pretty good volume," he said. "And it's going-away volume too, so there are real buyers in the market."

Correction possible

The market will likely take a break from its relentless tightening at some point after the weekend, Riley reckoned.

"I would assume at some point next week we'll give up some ground," he said. "We've gone up and up and up, and you're definitely going to see some profit taking."

But Riley thinks demand is still strong for high-grade paper, and bargain hunters will probably put a limit on any correction.

"People will take the opportunity to buy any dips throughout the week," he said. "Any of the government-guaranteed paper will continue to see very strong demand."

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