Agency spreads tighten slightly; callable activity 'brisk'; Operation Twist tightens curve

By Lisa Kerner

Charlotte, N.C., Sept. 29 - Agencies found support and selling dissipated on Thursday, with spreads tightening by 1 basis point on the day, according to Michael Skinner, director of callable agency trading at Guggenheim Partners.

Agencies looked attractive relative to Libor on a swapped basis.

Skinner said support came in the form of five-year Libor at plus two or three. It is usually minus 8 to minus 12.

"Agencies are starting to perform better, he said.

With the month-end and quarter-end "window dressing out of the way," Skinner expects business to be "back to usual" in October.

Europe's financial situation continues to weigh heavy on investors. It is on everyone's mind "as soon as they walk out the door; it's what they pay attention to," Skinner said of fellow traders.

Callable activity was "pretty brisk" on Thursday. "A lot of stuff has been called away," said Skinner, referring to it as the new reality. "People have to get used to it."

Step-ups have seen some "decent bounce back" of some 10 bps to 15 bps in the last week, thanks to a steeper yield curve, said a trader. Spreads were steeper in the two-year and 10-year sectors, which helped step-ups.

The Fed's Operation Twist resulted in a quick tightening of the curve.

"A lot of redemptions coming in, with rates on bonds historically low," said the trader. That money from redemptions is then being reinvested.

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