Agencies flat as weak data prompts flight to quality; low supply ahead could help spreads

By Kenneth Lim

Boston, July 16 - Agency spreads closed mostly flat on Friday as falling consumer prices set off a wave of risk aversion.

Bullet spreads ended the day flat to 1 basis point tighter, with longer-dated agencies outperforming the shorter part of the yield curve.

"Agencies managed to keep up with Treasuries for the most part," an agency trader said. "Twos, threes, fives were pretty much unchanged. Ten years and out were about 1 bp tighter."

The stronger showing by longer-dated paper was a reflection of the low yields at shorter maturities, the trader added.

"Accounts were looking for safe paper to hold for the weekend, but some of them don't like the yields at the front end, so they go out on the curve to pick up that extra yield," the trader said.

Callable issuance slowed down on Friday after a brisk week, as the slow volumes ahead of the weekend put a drag on the entire market.

"It was really quiet today," the trader said. "[There's] just not a whole lot going on. It's a summer Friday; a lot of people aren't at their desks."

Weak data sparks flight

Absolute yields fell on Friday as investors bought into high-grade products on the back of disappointing consumer price numbers.

The Consumer Price Index slipped by 0.1% in June, according to the Labor Department on Friday. The Thomson Reuters/University of Michigan consumer sentiment index also dropped to 66.5 from 76 in June, more than the Street was expecting.

That data set off another wave of flight-to-quality buying, the trader said.

"The numbers were pretty disappointing," the trader said. "It's a lousy way to end the week."

The weak economic numbers should not have been too big of a surprise for the market because earlier signs had already suggested that June was not a strong month for the economy, the trader added. But investors preferred to be cautious heading into the weekend.

"When you get something like this on a Friday, investors want to do the safe thing," the trader said. "And the safe thing to do is to hold quality over the weekend and move back out on the risk curve next week if nothing worse happens in the meantime."

Tights could hold

Yields could remain low and the market could remain tight next week as the economy continues to weigh on investors' minds, the trader said.

"They're saying that it's going to be a long, slow slog, and that means we're going to be in this new normal for a while," the trader said.

The supply picture is also looking thin for the week ahead. The benchmark issuance calendar's next opening is on July 20, when Federal Home Loan Banks is expected to make an announcement.

"I don't expect to see a big deal coming out of Home Loans," the trader said. "That might keep spreads tight. Unfortunately wider spreads is what we need right now because yields are too low to convince people to start buying. So it's great if you're just looking at spreads, but if you're looking to buy anything, it's not good at all."

© 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.