Agencies tighten as Libyan ceasefire, G-7 action on yen raise Treasury yields; data eyed

By Kenneth Lim

Boston, March 18 - Agency spreads closed a touch narrower on Friday amid quiet trading as Treasury yields continued to rise on an easing of geopolitical concerns.

"On the day, not a whole lot [is] going on," an agency trader said, noting the market was "maybe a little bit tighter in spreads across the curve."

Trading volumes were typically light for the end of the week.

"Kind of a slow Friday," the trader said.

Callable activity remained muted, with issuance concentrated in shorter maturities.

"There were a few underwritings mostly in the short end, I guess," the trader said. "[Federal Home Loan Banks] came in and auctioned quite a few items in the short end...[Federal Farm Credit Banks] wasn't as active as they were yesterday."

Although yields rose over the past two sessions, coupons are still stuck within the recent trading ranges. That has not provided enough incentive to boost demand appreciably.

"We've been kind of stuck in this range," the trader said. "We've been trading around 3.28-ish, 3.23-ish, but that's still within the range, so we haven't really backed up."

But issuers called a good amount of paper on Friday, which could boost issuance after the weekend on yield increases.

"I anticipate more issuance next week, especially on pullbacks, but we haven't broken out of any kind of range here as of late," the trader said. "There are probably a lot of accounts sitting on the sides waiting for the pullback."

Flight to quality eases

The safe-haven bids that pressed yields lower for the first half of the week eased over the past two days, another trader said.

On Friday, the Libyan government declared a ceasefire against the opposition after the United Nations Security Council approved a no-fly zone over the country. Oil prices eased following the news.

The Group of Seven central banks also said overnight that it would intervene to stem the sharp rise in the value of the yen on expectations of high demand for the currency following the natural disasters that struck a week ago and the ongoing nuclear crisis.

"There wasn't any real negative news on the geopolitical front today, so the market kind of breathed a sigh of relief and took the opportunity to take some profit," the trader said.

The market is still nervous about the situation in both countries, and most investors are squared going into the weekend, the trader said.

"I would say the market's kind of neutral right now," the trader said. "We took some profit off the top of what was a very good week for rates. But a lot of things could happen over the next two days. I don't think anyone's really making any big directional bids right now. Take your profit, hang on to the cash and see how things are on Monday."

Home sales, supply ahead

Investors in the week ahead will be focused on home sales data, especially on the heels of a lackluster housing starts figure, the trader said.

"We have existing and new home sales Monday and Wednesday," the trader said. "Jobless claims and supply announcements on Thursday. Then Friday's GDP, that's going to be a big piece of data to end the week."

Agency supply could come late in the week ahead, with Freddie Mac's calendar announcement slot coming on Thursday, March 24.

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