Agencies mark time as Treasury auctions, non-farm payrolls loom; callables take in interest

By Kenneth Lim

Boston, March 29 - Agency spreads closed flat again on Tuesday as bullets took a backseat to trading in callables, which benefited from some auctions.

Bullet spreads were unchanged on the day, with the five-year spread narrowing by just half a basis point.

"Bullets were quiet today," an agency trader said. "I did see some buying across the curve, but mostly five-years and out, but in terms of spreads, not much was going on."

The two-year spread actually narrowed by 3 basis points, but that was on the roll trade.

"The roll was worth about 3 bps," the trader said. "So optically it looked like it came in 3 bps, but actually it didn't move at all."

Callables had a busier session, as Federal Home Loan Banks and Federal Farm Credit Banks held some auctions, the trader said. But the bulk of the activity surrounded older issues.

"Good buying on the callable side," the trader said. "mostly in secondary structures. Not much new stuff done today [...] There were all kinds of different structures. A lot of one-year callables in addition to three- and five-year structures."

Auctions, payrolls weigh in

Trading volumes in general have been muted because of the volatility surrounding the week's Treasury auctions and Friday's employment situation report of non-farm payrolls and unemployment figures.

"I think volumes are definitely going down for the quarter-end here," the trader said.

The trader said that many investors were happy to do some buying as absolute yield levels increased, and there was some buying in the market on Tuesday, but most accounts were already done for the quarter.

"There are good volumes going in the broker market in terms of guys swapping stuff around, but in terms of clients, I think they're done."

Investors were also waiting to see how the Treasury's seven-year auction would turn out on Wednesday after disappointing offerings of two- and five-year debt on Monday and Tuesday.

"The seven-year auction tomorrow is another big reason guys are not ready to make a big move," the trader said.

Unwilling sellers

The lack of benchmark supply over the next two weeks also reduced the incentive for investors to take profit on recent tightening.

"I did see a lot of stuff today - and I bid on a lot of stuff - and I thought I was being aggressive as well, but there's not a lot of supply, so guys are willing to hold on to stuff for a little longer," the trader said.

The market is generally trying to cut down on their exposure in case of a strong non-farm payroll number on Friday, the trader said.

"I see some guys trying to move old stuff ahead of non-farm payrolls, trying to get their risk down and clean up a lot of stuff," the trader said. "But any stuff over the last few days, they seem willing to hold on to it."

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