Agency spreads narrow in quiet session; week's strength could continue as supply beckons

By Kenneth Lim

Boston, June 18 - Agency spreads closed flat to slightly tighter on Friday as a slew of distractions kept volumes extremely thin.

Bullet spreads were a little narrower on the day as Treasury yields rose. The new Federal Home Loan Banks 0.875% Global Notes due August 2012 closed at a bid spread of about 22 basis points over Treasuries and an offer spread of 21 bps. Fannie Mae's Benchmark Notes due June 2013 were at 15.5 bps bid, 14.5 bps offered.

"The overall tone in the market remains strong, particularly in the front end," said Mike Goldman, head of agency trading at Guggenheim Partners.

But the pricing levels came with the caveat that actual volumes were very low.

"There's absolutely nothing going on today," Goldman said. "People are watching soccer, watching golf."

Christopher White, senior vice president of fixed income sales and trading at Moors & Cabot Capital Markets, echoed those sentiments.

"Between the U.S. Open, the World Cup and 90-degree weather, it's pretty darn quiet," he said.

Strong week

The market ended the week with a positive tone, having narrowed about 5 bps across the curve over the past five sessions.

"What I've seen this past week is spreads have tightened," White said. "We have seen a little liquidity in the off-the-runs and I think that's because...of low absolute yields in the short end, so there's a tone of buying in the two- to three-year part of the curve."

The demand for short-term paper may have caught some dealers by surprise, leading some of them to effectively be short on some two- and three-year issues in order to provide supply for their clients.

"I think the Street wasn't prepared for the amount of buying," White said.

Supply ahead

Strapped for inventory, those dealers will be looking to Freddie Mac to add some supply in the coming week.

Freddie Mac has a calendar announcement on Reference Notes on Thursday.

"We're looking hopefully for some supply," White said. "We expect that Freddie Mac will announce something on June 24, and the Street is hoping again for a two- or three-year to alleviate the shorts in that area."

Goldman said the market's current strength should last over the weekend.

"I don't see any reason for the tone in the market to change," he said.

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