Agency debt widens, dragged out by swaps; investors waiting for Treasuries to calm down

By Kenneth Lim

Boston, Jan. 20 - Agency spreads widened slightly on Thursday as the market remained stuck in negative swap currents.

Bullet spreads closed about 1 to 2 basis points wider versus Treasuries, and a little cheaper against swaps at the belly of the curve, in a reversal of Wednesday's outperformance.

"[There was] decent selling by customer accounts, which took us wider, and as swap spreads went wider, we went with them; then we started to recover later in the afternoon," a dealer said.

One trader said callable activity remained light, although Thursday's higher yields could spur more demand soon.

"There's usually a bit of a lag. People want to see if coupons are going to go up some more, but I think at these levels we're going to see the buyers make their moves soon," the trader said.

Swaps take lead

Trading volumes were light again, and in the absence of strong flows, agency investors simply took the lead of the swap market.

"We're operating in the shadow of swaps," the trader said. "There's a lot of issuance, swap spreads are widening out, and there's nothing really going on in agencies right now to resist that."

On the whole, agencies could be heading into the weekend unchanged in terms of spreads, the trader added.

"It's been a pretty uneventful week," the trader said.

Federal Home Loan Banks' decision on Tuesday not to issue new Global Notes this month also deprived the market of an event that could have attracted attention among investors.

"It's almost as if Home Loans took away a focus for the market," the dealer said.

The sentiment in the market is also that the week's active primary market for supranational and sovereign debt has distracted some potential agency investors.

"We were kind of thinking that it should have been a positive week for agencies because Home Loans didn't bring any supply, but it might be the large calendar in supra-sovereign bonds at good levels putting pressure on agencies," the dealer said. "They're always big in January and February, front-loading their financing, but I can't really say for sure because I haven't seen the trades."

Eyes on Treasuries

Investors are also wary about the direction of absolute rates, concerned that yields could go higher.

"I think people are worried the market's just gonna puke and Treasuries will go to higher rates," the dealer said.

If Treasuries "simmer down," that might bring bids back to the market.

"If the Treasury market puts a bottom in and holds, people will come back to buy," the dealer said. "We got close to 3.50% today, and people were thinking the damage was done."

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