Spreads hold ground in face of Treasury rally; FHLB deal expected in economics-heavy week

By Kenneth Lim

Boston, Sept. 13 - Agency spreads kept pace with rallying Treasuries on Monday as tight supply and the recent back-up in yields supported demand in the market.

Bullet spreads closed mostly flat versus Treasuries on Monday, an agency trader said.

"There was some buying today, especially at the front end after yields rose last week," the trader said. "A bit of bargain hunting."

The higher yields also gave callable issuance a boost with decent volumes on Monday.

"Guys will try to take advantage of backups in rates to get higher coupons," the trader said. "Demand for callables is still strong, but there's kind of a buy-on-backups phenomenon in the market."

Overall volumes were decent, the trader said.

"It was a little quiet, but all in all not a bad day," the trader said.

"Agencies managed to stay in line with Treasuries, so did not underperform even though rates fell."

Bargain hunting

The trader said fixed-income markets saw buy interest on Monday following the previous week's drop in prices.

"That's why the markets are doing well even though stocks are up," the trader said. "After thinking about it over the weekend, I think guys have come to the conclusion that some of the selling was overdone. The economy's not going to hell, but it's not exactly in heaven."

Michael Gladden, vice president of institutional sales at Mischler Financial Group, said supply in agencies has also been tight, which has helped to support spreads.

"We have not seen any relinquishing of the tightening bias," he said. "We've been tightening for the past few months, and we haven't seen any let-up even with the sell-off from 2.45% in [10-year Treasuries] to 2.85%. That did not curb any demand."

"Supply is very specific," Gladden added. "They're small issue sizes and they're not in general areas of the curve."

FHLB ahead

The market could see some front-end supply from Federal Home Loan Banks on Tuesday, when a calendar slot opens for the agency.

"I'm guessing two- or three-years," the trader said.

The trader does not expect a sizeable deal like the $5 billion five-year offering of Reference Notes by Freddie Mac the week before.

"They could, but I don't think Home Loans' needs are as big as Freddie Mac's there," the trader said.

"Home Loans has been quite disciplined about its fundraising, so I don't think we're going to see a $5 billion, $7 billion kind of deal from them."

The rest of the week could see some volatility with a number of economic reports ahead. Retail sales figures come out on Tuesday, while the Industrial Production Index for August will be released on Wednesday. Jobless claims on Thursday and the Consumer Price Index and Consumer Sentiment on Friday will round out a busy week for economic data.

"A lot of data over the next few days," the trader said. "And the market's back in full swing after the holidays, so it should be a pretty active week."

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