Agencies widen as Treasuries stage climb; spreads underperform in week; Fannie Mae ahead

By Kenneth Lim

Boston, Aug. 20 - Agency spreads eased out slightly on Friday as Treasuries rallied early in the day amid persistent economic worries.

Bullet spreads closed unchanged at the shorter end of the yield curve and widened by about 1 basis point at the long end.

"There was a lot of activity early in the morning, but that has quieted down," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

Trading volumes on the day were relatively quiet despite the morning rush, although callable issuance continued to see brisk business.

There was a lot of callable issuance, Hurley said. "The bulk of the issuance still seems to be in step-ups."

Step-up callables are seen as defensive instruments in the current low-rate environment, she added.

"It's a defensive structure that steps up if it's not called, which people like given how low rates are," Hurley said. "If they're called, you still pick up more than what you would on a Treasury or a comparable agency bullet. If perchance the market does start going down, which is probably not likely in the near term, you do have a defensive structure."

Early moves

The market was most active in the morning as Treasuries staged a rally, which was seen as riding mostly on the momentum of the strong gains earlier in the week.

Treasuries eased off their intraday high prices in the afternoon as the stock market began to climb, but by then the agency market was slow to respond.

"It's a Friday in the summer," Hurley said. "I think people were really active in the market before they called it a day early."

Soft week

Agencies ended the week wider than when they started, with the market unable to keep up with surging Treasuries.

But the yield curve has been flattening as investors shift toward longer maturities in order to pick up yield.

"The curve has definitely flattened," Hurley said. "With short rates as low as what they are, and with Fed policy on hold and possibly moving to accommodation, people are moving to pick up yield given how low short rates are."

After the weekend, Fannie Mae could add supply with a calendar opening on Thursday.

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