Agency spreads make late push inwards; rate buyers could emerge amid new Treasury supply

By Kenneth Lim

Boston, April 23 - Agency spreads finally tightened on Friday, halting a weeklong slump on hopes of better rate buying after the weekend.

Bullet spreads narrowed by about 0.5 to 1.5 basis points across the yield curve, said Mark Noble, head of agency at MF Global.

"We tightened across the curve," he said. "On Thursday we widened out about 2 bps; today we tightened in about 1 bp to 0.5 bp across the curve."

After a week of mostly widening spreads and hesitation by investors, Friday's action seemed to reflect a sense that buyers should return after the weekend.

"The market still feels that the supply picture and the technicals bode well for agencies," Noble said. "Libor levels at the front end are very attractive, too."

Although agencies are very tight against Treasuries at the moment, they are relatively attractive compared to swaps, Noble said.

"For guys that follow Libor valuations, two-years in Libor are in the minus 2 bps area, three-year Libor in the minus 1 bp area, so it's very attractive versus Libor," he said. "We're pretty tight versus Treasuries, but it feels like there's still this struggle between valuations right now."

Overall tightness

Agency spreads benefited from general richness in spread markets, Noble added. He cited reports on Friday that debt issues by non-financial companies are the tightest they have been since the credit crisis in 2008.

"All spreads tightened in today," he said.

There were also reports that some members of the Federal Reserve's Open Market Committee could be leaning toward selling some of the Fed's mortgage-backed securities, which were purchased over the past year to provide liquidity to credit markets.

But Fed chairman Ben Bernanke's reported reluctance to do so in the short term is alleviating some of those concerns for the moment, Noble said. For now, the market is more interested in the $129 billion of Treasury auctions in the coming week.

"I think any concern in the marketplace...is the Treasury auction," he said. "I think generally the focus will be on the absolute yield levels."

A sell-off in rates could bring buyers back to agencies, Noble said.

"Generally, if rates sell off there will be natural buyers of agencies, especially if you hit 1.15% on two-years," he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.