Agencies narrow as swaps, Treasuries improve; new Freddie Mac supply could loosen market

By Kenneth Lim

Boston, July 28 - Agency spreads tightened on Wednesday as investors continued to move out on the risk curve to pick up better yields than pricey Treasuries.

Bullet spreads narrowed by about 4 basis points in the two-year sector on the roll trade, while maturities of five years and longer saw spreads come in by about 1 bp.

"Agencies did very well," said Craig Ziegler, an agency trader at Gleacher & Co. "Swaps tightened by 1 to 2 bps again today."

Callable issuance was also active, another agency trader said.

"There was a bit of a pause because of the Monday, but there was a back-up in rates and the buyers came back again," the trader said. There were "still a lot of step-ups."

Trading volumes were an improvement over Tuesday, the trader said.

"Saw pretty good buying today," the trader said. "It was a combination of swaps getting tighter and people looking for better yields."

Strong start

The agency market has had a strong start, consistently outperforming Treasuries since Monday.

"It's been a feeding frenzy all week," Ziegler said. "Customers keep on looking for yield, and you see agencies fill that void."

The other trader added that strong corporate issuance has fuelled a tightening of swap spreads, which have helped to pull agencies narrower. The Treasury market, meanwhile, experienced some weakness early in the week as supply loomed.

"We're kind of enjoying the result of having tighter swaps and weaker Treasuries working in our favor," the trader said. "Then we had the roll in the twos today, so that helped at the front end, although without the roll twos are probably only about 0.5 bp tighter."

Freddie Mac ahead

But the market could ease off the current tights in the second half of the week, the trader said.

Freddie Mac on Thursday will announce whether it is issuing Reference Notes, and market expectations are for a reopening in the two- or three-year sectors.

"You could see a bit of softening in the front end because of supply," the trader said.

On the other hand, Treasury auctions come to a close on Thursday with the sale of seven-year Treasury notes.

"You won't have any kind of supply pressure on Treasuries, so we could see Treasury yields fall again, especially if we continue to get bad economic news," the trader said. "It's going to be hard to keep up with Treasuries if that happens."

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