Agency callables tighten on lower volatility, bullets unchanged; all eyes on Treasury auctions

By Kenneth Lim

Boston, July 27 - Bullet agency spreads hovered unchanged Monday while callables contracted as the market waited for clarity on supply from the Treasury and Freddie Mac.

"Spreads are holding pretty steady today," said BMO Capital Markets agency trader Eric Herndon. "It's been a rather lackluster day, not much going on."

Callable spreads continued to tighten, Herndon noted.

"Callables have come in a little bit," he said. "Volatility is down the last couple of days. Issuance has still been rather robust because volatility is still high, but spreads are in 3 to 5 basis points."

The coming Treasury auctions were on the top of investors' minds, with massive offerings slated in the short- to intermediate-sector of the curve. The Treasury will sell $42 billion of two-year Treasury notes on Tuesday, $39 billion of five-year Treasuries on Wednesday and $28 million of seven-year Treasuries on Thursday. The Treasury on Monday also sold $6 billion of 20-year Treasury Inflation Protected Securities at a yield of 2.387%.

"People are paying attention to the Treasury auctions this week," Herndon said. "I think things are going to move around the peg for a while."

Small Freddie Mac deal seen

Freddie Mac is expected to announce only a small offering of Reference Notes on Wednesday, Herndon said.

"I'm thinking it's probably going to come in lighter than expected, if at all," he said. "They've tightened in their spreads a little, so I'm not sure how it's going to be in terms of size."

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