Agency spreads widen with swaps; continuing Europe concern holds key to volumes: trader

By Kenneth Lim

Boston, May 13 - Agency spreads eased out slightly on Thursday on a slow day of trading, taking the lead from widening swaps.

Bullet spreads widened by 0.5 to 1 basis point across the yield curve, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

"It was fairly quiet today," she said. "Attention continues to be focused on activities overseas and in the 30-year [Treasury] bond auction today."

New callable paper saw decent uptake in the market, but overall issuance has been slow because volatility has come down dramatically, Hurley said.

"There has been some issuance, and it's getting put away, but it's definitely not as heavy as it was even two weeks ago, prior to when all of this stuff, starting with Greece and spreading to other countries, got reignited," she said.

Another agency trader said the market was keeping pace with swaps, which continue to widen.

"The market's just taking its cue from swaps," the trader said. "There's nothing compelling in agencies today to really move spreads either way."

Languishing volumes

Market volumes remained lackluster on Thursday, the trader said.

"It's really quiet," the trader said. "It almost feels like July or August. I've been sitting here all day, waiting for the weekend."

Agencies are trapped between rate buyers, who expect yields to rise at some point, and risk investors, who think that agencies are too tight against Treasuries.

"It's kind of like we've got the worst of both worlds," the trader said. "The rate guys who would normally be buying agencies now are kind of waiting for rates to go back up. The folks who are stepping back from the flight-to-quality kind of trade are going into corporates because the yields are just that much better there. Agency bullets are kind of boring."

Europe remains big factor

Weak volumes will probably still ail the market as it enters the weekend, Hurley said.

"Tomorrow's Friday, so I really don't see it improving tomorrow," she said. "It just kind of depends on how next week develops."

An improvement in sentiment over Europe's debt problems could be the key development that could bring activity back to agencies.

"I think we need to have some of the concerns about many of the sovereign issuers quieted down," Hurley said. "The $1 trillion relief package that we got was a help, but the bottom line is it has to be implemented, so while the sovereign thing has quieted down a little, it hasn't gone away."

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