Agencies lag as Treasuries climb after Bernanke's dovish speech; FHLB skips issuance slot

By Kenneth Lim

Boston, June 8 - Agency spreads widened slightly on Wednesday in the wake of another drop in Treasury yields, while Federal Home Loan Banks decided not to use an issuance slot to offer new Global Notes.

Bullet spreads eased out from Treasuries at the front end of the yield curve in the wake of comments by Federal Reserve chairman Ben Bernanke on Tuesday describing the economic recovery as slower than expected.

"There was a little bit of widening in the front end with the rally in euros, and Treasuries and swap spreads kept pace a little better," a trader said. "I'd categorize today as flattening of the agency curve versus underlying Treasuries."

Agencies also benefited slightly from some profit-taking in the preferred covered market.

"That market has sort of run its course," the trader said.

The callable market saw decent volumes with signs of buying as investors on the sidelines stopped waiting for a back-up in yields.

"I think what's happening is the yields continue to shrink down to the point where people just have to put money to work," the trader said.

Trading volumes continued to be sluggish.

"Investors are tired of chasing yield and everyone's ready for the summer time," the trader said.

Bears throw in towels

Yields fell again on Wednesday, with the 10-year Treasury yield moving decisively below 3% in the wake of Bernanke's Tuesday comments.

In a speech, Bernanke said the pace of economic recovery was slower than expected, and he signaled that the Fed was unlikely to depart from its current accommodative interest rate policy while the labor market continues to struggle.

With the latest round of yield declines, many investors who were short and those who had simply been waiting for a correction finally gave up and came back into the market.

"There was a fair amount of profit-taking the last couple of days when we got to 3% on 10s, and everyone's looking for a pullback going into these auctions and we haven't gotten that," the trader said.

There was also better buying in agencies in the longer end of the bullet yield curve, causing the spread curve to flatten.

"There was buying of bullet agencies out the curve, which was symptomatic of 10s finally punching through 3%," the trader said.

The relentless march lower in yields has led to investors furiously trying to keep up.

"I don't think the market was short a week or two ago, but the grind lower has created some shorts," the trader said. "There's just too much money chasing too little yield."

FHLB skips issuance

FHLB said Wednesday that it would not use its calendar slot to issue any new Global Notes this week.

The market had largely been expecting the agency to pass because it has very low funding needs at the moment. But with supply dwindling this year, investors were nevertheless disappointed not to get a little bit of liquidity relief.

"I know people were hoping they'd at least throw $3 billion out there for people to play with," the trader said.

FHLB's next issuance opening is on July 19.

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