Agency spreads tighten slightly; callables rest for holidays; Treasury auctions on horizon

By Kenneth Lim

Boston, Dec. 24 - Agency spreads narrowed by a pinch on Thursday as the market slowed down to a crawl ahead of the long weekend.

"Spreads are in about a bip," an agency trader said. "Today's been anemic."

Some trading was seen in the seven-year sector. Yields are attractive at the belly of the curve at the moment, and buyers appeared to be happy with making roll trades in those sectors, the trader explained.

"I've seen some buying in seven-years, but it's like $10 million," the trader said. "It's just been very, very quiet."

Otherwise the market was extremely slow on Thursday, which was a half-day for bond markets. The week in general had been plagued by weak liquidity as market participants began to wrap up for the year.

"There's been some buying in the product just at the higher yield levels, but it's a holiday week so not a huge amount of things [are] going on," the trader said. "We had the Fed buyback at the start of the week and it was very small, and that's been it. [There was] certainly no huge event this week."

Callables take a break

Callable issuance, which has remained strong for most of the week, finally succumbed to the holiday slowdown on Thursday, with only two deals printed, the trader said.

"You'd expect with these higher yield levels there would be some trading, but today so far there are two deals," the trader said. "There's nobody in on the swap side, so it's hard to find people to make the trades you need."

Auctions on the horizon

Trading activity should continue to be thin when the market returns after the long weekend, but Treasury auctions from Monday to Wednesday could have an impact on spreads, the trader added.

The Treasury will offer $118 billion of two-, five- and seven-year notes in the week ahead, and the additional supply in a holiday week could weaken Treasuries.

"If the auctions don't go well, we'll see some buying in agencies," the trader said. "If we see a rally in the Treasury side, we should see selling on the agencies side."

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