Agency spreads widen on Treasury supply; slack activity to persist until next week: trader

By Kenneth Lim

Boston, April 22 - Agency spreads continued to widen slightly on Thursday as an announcement of new Treasury supply after the weekend raised expectations of higher rates.

Bullet spreads crept slightly wider on Thursday, continuing Wednesday's easing.

"It was fairly quiet today," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co. "Spreads were unchanged to maybe half a basis point wider."

Callable issuance was stronger, with most of the new paper offered getting snapped up, she said.

"We're having a lot of new issuance callables being printed," Hurley said. There are "a lot of step-ups because of the shape of the curve. A lot of it is getting done, and the callables are getting very well received."

Treasury to sell $129 billion

The Treasury said Thursday that it will sell $129 billion of two- to seven-year Treasury notes and Treasury Inflation Protected Securities in the coming week.

The announcement was widely anticipated by investors after two weeks without additional Treasury supply. The thinking is that the supply will help to cheapen a market seen as extremely rich at the moment.

"You would think that the dealers are going to want to cheapen up the market to get a little bit of concession for that supply," Hurley said.

The sizes of the coming auctions were mostly in line with most predictions, although the plan to sell $11 billion of five-year TIPS was more than the Street was expecting, Hurley said.

"The only one that was a surprise was the TIPS, which was about $1 billion higher than expected," Hurley said. "The twos, fives and sevens came in exactly as expected."

Rates expectations damp trading

Hurley was not hopeful for a last-minute spike in agency trading to liven up a dull week for the market.

"It's going to be Friday, and it's going to be very quiet," she said.

Thursday's slight widening brought spreads to about 1 to 1.5 bps farther out from Treasuries than when the week began, Hurley said. But investors who had been waiting for the market to cheapen are unlikely to be impressed.

"We're a little bit cheaper today, but for the most part, 10s are nowhere near the 4% that they touched a little while ago," she said. "Relatively speaking, things still look expensive."

The prospect of significant Treasury supply next week will also give potential buyers pause before putting any money to work because rates could increase in just a few days.

"We have a lot of supply coming in the Treasury market," Hurley said.

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