Agencies end unmoved despite swap tightening on Treasury volatility; small FHLB deal expected

By Kenneth Lim

Boston, Nov. 15 - Agency spreads stayed unchanged on a quiet Monday despite tightening in swaps as investors waited for rates to stabilize.

Bullet spreads closed flat on the uneventful day. Swap spreads narrowed versus Treasuries, but agencies failed to follow.

"It was a very quiet day," said Mike Goldman, head of agency trading at Guggenheim Partners. "Interestingly, though, we had tightening in swaps."

Callable issuance continued at a reasonably active pace, although the market is still trying to get through a glut of inventory, which could slow issuance for a while.

"I think it's going to slow down a little bit," Goldman added.

Agencies' underperformance was a reversal of previous weeks, when agencies had held firm despite widening swaps. That kind of swing in the agency-swap spread reflects a bit of torpor in the agency market, Goldman said.

"When swaps go wider, agencies don't move, so they outperform," he said. "When swaps go tighter, agencies just sit there. Agencies are not doing anything."

Waiting for calm

Investors are holding back partly because of the recent run-up in absolute yields amid some indigestion in the Treasury space.

The additional yield that agencies offer over Treasuries become less significant when absolute yield levels increase, Goldman said. When a five-year note was yielding 1.2% or 1.1%, for example, a spread of 17 basis points meant that, percentage-wise, investors would get relatively more yield on an agency note. But with five-year yields at about 1.5% to 1.51% now, a spread of 17 bps represents less of a yield pick-up.

"People aren't grabbing agencies at these spreads," he said.

In a rising rate environment, investors are also more inclined to simply wait for Treasuries to hit the yield that they want, rather than buy riskier agencies.

"Momentum is toward higher rates now," Goldman said.

Interest in agencies could recover when yields stop climbing.

"I think you could be in a situation now where if we don't see this kind of widening, we could see agencies catch up," he said.

FHLB ahead

Federal Home Loan Banks on Tuesday is expected to make a calendar announcement on Global Notes issuance.

The market's expectation is not for a big offering, and if there is any issuance it will probably come at the front end of the yield curve.

"Twos have backed up a little bit," Goldman said. "I think they'll go with the easy way out and say twos or threes."

Beyond the supply, investors are keeping an eye on Treasuries and swaps, hoping for some stability.

"I think we're going to watch what will dictate how the Treasury market gets its footing and which direction swap spreads go," Goldman said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.