Agency spreads flat as market pauses from rally; month-end could drive activity ahead

By Kenneth Lim

Boston, March 26 - Agency spreads closed unchanged on Friday as the market took a breather after a hectic week.

Bullet spreads ended flat to slightly tighter on paper-thin volumes, said Michael Skinner, an agency trader at Wall Street Access.

"You could hear a pin drop," he said.

Callable issuance was slow as well, with demand dragged down by the impressive performance in swaps over the week. Tighter swaps mean that callable notes are richer, even though the rally in rates has given yields a boost.

"Callables were quiet," Skinner said. "With swaps in as much as they've been in, it's almost a kind of sticker shock...Customers have been a little taken aback by the swaps rally."

Swaps led in week

The past week's performance has been driven largely by an impressive tightening in swaps and weakening of Treasuries, Skinner said.

"It's obviously been a pretty crazy week," he said. "Treasuries have gotten mauled as people buying Treasuries are now not so certain about the fiscal state of the union...10-year swaps are in about 10 basis points, and while agencies have tightened a little, they have not been able to keep up with swaps. But they have certainly outperformed Treasuries."

Friday's quiet market was almost a much needed break, Skinner added.

"Today was almost a relief of sorts," he said.

Month-end beckons

There is no calendar supply in the pipeline to stir investor interest in the week ahead, but market activity should pick up easily after the weekend as the month and quarter draw to a close, Skinner said.

"I think we'll see some decent month-end buying," he said.

Callable issuance should also resume its brisk pace despite the recent richening demand that remains strong, Skinner said.

"There is only so much product available," he said. "I think once customers realize that, they'll start to buy again."

The Treasury market, which saw prices fall over the week, could have an impact on spreads again.

"A lot of eyes will be on the Treasury market," Skinner said.

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