Agency spreads widen on more Greece concerns; month-end buying helps withstand swap slide

By Kenneth Lim

Boston, April 30 - Agency spreads widened on Friday as concerns about Greece continued to weigh on the market, but month-end trading led to outperformance versus swaps.

Bullet spreads shifted by about 1 to 2 basis points across the yield curve over the day, although five-years saw slight tightening.

Callables saw large issuances, particularly from Federal Home Loan Banks, and Friday's Treasury rally helped to boost demand for structures.

"Still good, solid interest," a trader said Friday. "Particularly with the market rally...This typically happens when the market rallies. People need to reach for yields."

Trading volumes were moderately robust on month-end activity.

"We saw some good buying today," the trader said. "A lot of it was related to month-end adjustments."

Swaps pull spreads out

Friday's widening was related to a sharp outward move in the swap markets, market sources said.

"Front-end swaps widened a lot today," one agency trader said. "Agencies followed a little bit, but actually outperformed quite a bit. Swaps are out, let's say about 5 bps. Agencies were out like one or 2 [bps]. Some of the three-years weren't even out that much, so agencies outperformed pretty strongly."

The trader said concerns about Greece was casting a shadow over spread markets.

"It's a huge albatross around our neck," the trader said. "They come up with a solution; it doesn't work; they continue renegotiating. It's really weighing on the market...I'm worried that we're pricing more than just Greece, we're pricing in some of the peripheral credits as well."

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, also noted speculation that the U.S. Federal Reserve might restart a foreign exchange swap line with the European Central Bank.

"There were rumors, unattributed and unconfirmed, that the Fed was talking to the foreign central banks about reinstating FX swap lines," he said. "In theory... the primary handle through which it would affect swap spreads is a worsening of perception of counterparty risk."

There was also concern about how much exposure European banks have to Greek and Portuguese sovereign debt, LeBas added.

Strong month

The market ended April on a positive note, having tightened against Treasuries, which gained in price over the month.

"Tightening spreads have allowed them to produce a little bit of excess return on the month," LeBas said.

Against swaps, agencies are mostly unchanged, with five-year Freddie Macs closing at about 5 bps over Libor on Friday, the trader said. The market was about 7 bps over Libor at the start of April.

"They've been really sticky around that Libor plus 7 level," the trader said. "I would say we're unchanged."

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