Agencies tighten amid bargain hunting, while yields fall on uneventful Bernanke speech

By Kenneth Lim

Boston, Sept. 8 - Agency spreads narrowed Thursday on modest bargain hunting even as Treasury yields fell on renewed concerns about Europe and a modest speech by Federal Reserve chairman Ben Bernanke.

Bullet spreads moved in by about half a basis point versus Treasuries on the day, continuing the tightening from Wednesday.

"Spreads came in," said Mike Goldman, head of agency trading at Guggenheim Partners. "Bullets have been trading very, very well."

The callable market was also active, with a large volume of new deals hitting the market on Thursday.

"A lot of callables printed today," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. "There are almost two and a half pages on the tape."

LeBas noticed that investors seemed to be looking further out on the yield curve when looking for new callable paper.

"It seems like the sweet spot it moving out a little bit, buyers moving out a little bit toward the five- to seven-year sectors," he said. "That's where the yield curve gets a little steeper."

Bargain hunting trims spreads

The market saw signs of bargain hunting Thursday as some of the less liquid paper, such as some medium-term notes, got bid up.

The recent spike in volatility and market uncertainty pushed many investors to the sidelines, and those who were still trading were mostly focused on the more liquid issues, Goldman said.

But the markets are more liquid now, with the uncertainty of the August non-farm payrolls already past and most investors back at their desks after the summer holidays.

"When the markets were very illiquid about four weeks ago, we saw widening between liquid and illiquid paper," Goldman said. "Some of that paper that has gotten very cheap people are buying them up again."

LeBas said volumes also picked up Thursday partly because of Wednesday's $1.25 billion reopening of two-year Global Notes by Federal Home Loan Banks, which provided "good secondary trading" in the front end of the curve.

"We've seen demand from public pension accounts and the banking sector this week," LeBas said.

Yields slip after speech

Yields fell Thursday on slightly weak data on the U.S. economy as well as rates-friendly comments by European Central Bank president Jean-Claude Trichet.

The ECB signaled that it would leave rates unchanged, citing "particularly high uncertainty and intensified downside risks," Trichet said Thursday.

In the United States, new jobless claims jumped to 414,000 in the week ended Sept. 3 from 409,000, slightly more than the Street estimates for 408,000.

Equity investors were also discouraged after Bernanke did not reveal any new plans by the Fed to take a more accommodative stance.

"The big non-story of the day was Bernanke's 1 p.m. speech," LeBas said. "I can't say much new content came out of it."

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