Agencies flat as new supply looms; callable bond issuance ebbs; markets 'toppy': trader

By Kenneth Lim

Boston, Sept. 21 - Agency spreads closed mostly unchanged Monday as investors awaited a number of Treasury auctions later in the week, while callable issuance slowed to a trickle following an active week.

Bullet spreads ended the day flat on light volumes, market sources said.

"It'd been somewhat of a light day," said Christopher White, senior vice president of sales and trading at Moors & Cabot Capital Markets. "Spreads remain unchanged. We haven't seen many new issues today...we do have auctions this week, we have the two-years, five-years and seven-years."

Callable issuance was noticeably slower after the busy previous week, said Michael S. Effron, head of U.S. government agency at Jefferies & Co.

"Today was probably the slowest day since the middle of August," Effron said. "We had tremendous volumes last week. We had less than $1 billion today, just about $861 million."

The sharp slowdown in callable issuance was partly a function of the sheer amount of paper issued the previous week, Effron said.

"[Federal Farm Credit Banks] got sold on most of their needs last week, and there's just a fair amount of supply out there," he said. "Dealer inventories are also a little heavy, they're looking to the quarter-end this week."

Treasury auctions ahead

The rates markets are looking toward the Treasury auctions and other news on the economic front in the middle of the week for a sense of supply, White said.

"This week the thing that could possibly affect the market is obviously poor auctions," he said. "There's also the G20 meeting at the end of the week; we could possibly have a joint statement that could be a negative to credit markets."

The U.S. Treasury will sell two-year notes on Tuesday, followed by five-years on Wednesday and seven-years on Thursday.

Correction possible in weeks ahead

White noted that Freddie Mac, which has an announcement on Reference Notes on Thursday, should see good response to a deal, if any, later in the week.

"We continue to see some strong buying in Treasuries and government debt, and until we see that ebb, you're going to have a fairly strong auction in the agency markets," he said.

But some markets could be due for a correction, he added.

"I think we're getting a little toppy on beta names, which are on-the-runs," he said. "It seems we've had such a good run. Corporates have mirrored equity markets...In my opinion we've had a rally in rates, a rally in equities, a rally in credit. It doesn't make sense to me. One of these markets is wrong."

There is also some year-end-related activity at play.

"What I find a little bit interesting is the three-month bill, which is going through about 9 basis points now. That's telling me that a lot of money is going into year-end that just wants to hide," White said.

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