Agencies tighten on week's strong Treasury auctions; bears struggle to wait out low yields

By Kenneth Lim

Boston, May 25 - Agency spreads narrowed on Wednesday as strong Treasury auctions and widening over the past few sessions encouraged buyers to step in.

Bullet spreads nudged tighter across the yield curve, with the two- and three-year sectors especially seeing good buying interest.

"Spreads performed better today," a trader said. "We finally got some stability kind of late yesterday, and we saw better buying this afternoon."

The callable market was mixed, with leftover inventory muddying the market.

"Some big deals printed last week, so there's some residual supply kind of kicking around the Street," the trader said.

The current low yield levels are dampening some of the demand for callable paper, but with the month-end approaching and yields not showing much signs of rising over the past two weeks, some investors are caving in.

"Some investors don't like the yields right now, but they recognize that they have to do something," the trader said.

Overall trading activity has been slower, with the market closing early on Friday and shut down on Monday for Memorial Day.

"I was just commenting today and yesterday that we saw so much color on the [Treasury] auctions that it gave me the feeling that there just wasn't anything else for the market to focus on," the trader said.

Spreads swing back in

After widening on Tuesday, agency spreads came back in on Wednesday as another strong Treasury auction emboldened rate buyers who had been afraid of climbing yields.

The Treasury sold $35 billion of five-year notes on Wednesday at a yield of 1.813%, with an especially strong bid-to-cover ratio of 3.2 times. The offering came on the heels of another strong auction in the two-year sector on Tuesday.

The auction-influenced rally was seen especially at the front end of the curve.

"It was more of a reaction to the two- and five-year auctions, and some short covering in rates," the trader said.

The five-year sector mostly benefited from bargain hunting after the sector suffered from some knee-jerk selling before the weekend on an unexpected $1 billion reopening by Freddie Mac.

"The five-year sector before the Freddie Mac deal was in the low 20s, then it widened to 25 bps and we had some peripheral supply in supra-sovereigns that pushed us out to 25.5, and now we're walking out the door at 24, 23.5," the trader said.

The market will probably hold on to the tightened spreads until after the weekend, the trader reckoned.

"With the month-end around the corner, some people may have some extension needs, but all factors point toward supporting spreads," the trader said.

Risks to that view include a "blow-up in Europe, which kind of hangs over our heads on an ongoing basis," and an extremely weak auction of seven-year Treasuries on Thursday.

Bears cave in

Some of the buying on Wednesday could have come from bears throwing in the towel as yield levels remain stubbornly low.

"There was a period around the midweek last week when it almost felt like a capitulation where some accounts facing month-end said, OK, I just need to put some money to work here," the trader said.

There is plenty of cash in the market waiting for better yields, and as Treasuries continue to demonstrate strength, investors do not have many other options.

"I know everyone would love to have a pullback, but some accounts have simply been waiting, and the Fed has indicated it's not going to change any time soon, and they're getting pushed out," the trader said.

The agency market has actually seen good buying whenever rates go up.

"Every little pullback we get, the Street prints new deals and investors come in and buy them," the trader 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.