Agencies tighten as Treasury sell-off gives investors entry point; risk aversion high

By Kenneth Lim

Boston, June 9 - Agency spreads narrowed on Thursday amid bargain hunting as Treasuries finally retreated on the back of a poor 30-year bond auction.

Bullet spreads closed about 2.5 basis points tighter versus Treasuries across the yield curve, with most of the buying coming near the front end, a trader said.

"Volume was good both ways," the trader said.

Callable issuance was also robust, with issuers eager to take advantage of the cheap funding.

"There's still a need to issue, especially with [Federal Home Loan Banks] with the amount of paper that's getting called away," the trader said. "Fannie Mae and Freddie Mac are still pretty active, and [Federal Farm Credit Banks] has been coming steadily almost every day."

Trading volumes improved as yields finally backed up after declining for most of the past two months.

"Agencies definitely performed better than they did yesterday," the trader said.

Yield relief sparks buying

Yields rose Thursday as investors finally took profit on the recent strength in Treasuries.

The sell-off in Treasuries was partly catalyzed by a weak $13 billion auction of 30-year bonds, which sold at a stop yield of 4.238% and a bid-to-cover ratio of 2.63 times.

"A lot of people are still trying to take profit and get out of the paper they've been trying to get out of," the trader said.

As yields increased, agency investors who had been hovering on the sidelines for most of the past week finally found an entry point to come back to the market. Most of the buying was targeted in the five-year and shorter sectors, the trader said.

Yields are still below where they were at the start of the month, but at least they were better than the year's lows that were reached on Wednesday.

"It's boiling down to the fact that they've got to put money to work," the trader said. "Nobody's making loans, and you couple that with the [economic] estimates that we're starting to see...and people are being forced to put money to work."

The strong buying interest even amid the selling suggested that investors were not extremely bearish about Treasuries, especially in the shorter term.

"There's still a lot of fear of risk out there," the trader said.

Lack of options

The market will probably continue to see good buying on any future back-ups in yields as market sentiment remains inclined toward low interest rate levels.

Investors are not necessarily excited about current yield levels, however.

"It's a situation where you don't have much of a choice," the trader said. "You've got to earn something on your money, especially if you're a bank or a fund manager."

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