Agency spreads widen in session as retail sales disappoint; supply quiet in week ahead

By Kenneth Lim

Boston, June 11 - Agency spreads widened slightly versus Treasuries on Friday as weaker-than-expected retail sales numbers put a damper on the market just ahead of the weekend.

Bullet spreads closed about 1 basis point wider in the five-year sector, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

"There was demand for higher-quality paper today," LeBas said. "Swap spreads have widened across the board, and agencies are not that much different versus swaps."

The swaps market was a key driver for agencies on Friday, the strategist said.

"We were following swaps, so some of the risk premium came out of the swaps market," he said. "Any outperformance of agencies versus swaps is really about risk aversion, which has been pretty good lately."

Trading volumes were below average, but typical for a summer Friday, he added.

On the week, agency spreads ended about unchanged to slightly tighter by just under 1 bp, LeBas said.

"But if you look at the patterns, it varied," he added. "We had about a 3 bps range within the week."

Lackluster session

One agency trader said Friday's weaker spreads were mainly a result of lower-than-expected retail sales in May.

U.S. retailers reported a 1.2% decline in sales during May, according to data by the Commerce Department.

"The Street wasn't expecting retail to drop," the trader said. "That softened up the market a little bit."

But the market's reaction was relatively muted. The widening would have been faster just a week or two ago, when investors were more skittish, the trader said. An improvement in the latest consumer sentiment and investors' acclimatization to "the new normal" in the markets' risks helped to offset the negative impact of the retail drop.

"One, the market's not as nervous as it was a couple of weeks ago," the trader said. "Two, it's kind of a quiet market today, so any kind of move is going to be a little bit muted."

Supply break

Looking ahead, the coming week should see some respite on the supply front. Investors in the past week saw Fannie Mae add $4 billion of notes to the front end of the curve, while the U.S. Treasury sold $70 billion of debt securities.

Federal Home Loan Banks is slated to make a calendar announcement on Global Notes on June 16, but the agency will probably raise a relatively small amount of money.

"Their deals generally haven't been huge," the trader said. An offering would be "probably at the front end, maybe a reopening."

But LeBas pointed out that the slowdown in Treasury and agency supply could present an opportunity for corporate issuers.

"The big news of next week is likely to be the restarting of the corporate bond market," he said. "That market's been on hold for a while."

New corporate issues could bring some money out of Treasuries and into agencies, LeBas said.

"I think actually the new issue markets probably bring a bit of a bid out of Treasuries into agencies, so I imagine it would be beneficial for agencies," he said.

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