Agencies unchanged, track Treasuries in slow session; supply ahead as economy casts shadow

By Kenneth Lim

Boston, July 9 - Agency spreads closed flat on Friday, staying in line with Treasuries in a quiet session as the market wound down for the weekend.

Bullet spreads ended unchanged on the day, but slightly tighter on the week, after a lackluster session, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"We're in pretty good shape," he said. "Spreads maintained about where they were. They were about plus 1 basis point in the morning, minus 1 bp in the afternoon. Historically we're in pretty good shape."

Callable issuance continued at a brisk pace, he added.

"We're seeing good two-way flow in callable agencies," Riley said. "We're doing a tremendous amount of business in step-up agency bonds, which offer a bit more of a defensive posture than straight callables."

Trading volumes were lighter than earlier in the week.

"Not a lot went on today," Riley said. "Yesterday and most of this week, though, we were pretty active."

But the thin volumes make it difficult to get a good reading on the market just based on closing spreads and prices, Riley noted.

"I don't really take a lot from a 10 or 15 bps move, especially in the summer," he said.

Supply, economy in focus

Investors will be closely watching the supply picture in the coming week, another agency trader said.

"There's Freddie Mac on the 14th," the trader said. "If they come out with something, it's going to be at the front end. That could put a bit of pressure on spreads at the front end, but that should be good for the market because we're so tight right now."

The Treasury will also sell three-, 10- and 30-year debt after the weekend, and that could affect spreads as well.

"That will be interesting to see how much demand there is for Treasuries, and indirectly how much risk appetite the market has," the trader said.

Beyond supply, the market continues to look for clarity on the economic front, the trader said.

"That's really the main driver behind the market right now," the trader said. "How's the economy doing? If you can answer that accurately, then you'll know where spreads should be."

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