Agencies widen as Treasuries trot ahead on mixed consumer data; supply, GSE meeting eyed

By Kenneth Lim

Boston, Aug. 13 - Agency spreads continued to expand on Friday as the market lost a step to resurgent Treasuries following unimpressive consumer data.

Bullet spreads eased out by about 0.5 basis point as Treasuries rallied.

"Spreads generally have been leaking wider all week, and I would say that continued today," an agency trader said.

Notes guaranteed by the Treasury through the Temporary Liquidity Guaranteed Program also saw some weakness, which is unusual given the lack of new supply in that market.

"We saw continued selling of TLGP paper, and you can now pick it up cheaper than where the agency paper trades," the trader said.

Trading volumes were noticeably thin.

"It was a relatively quiet day for a Friday," the trader said.

The Friday slowdown also hit the callable market, which was quieter because of lower overall yields.

"Callable spreads in general also leaked a little wider," the trader said. "I think buying hasn't been as brisk because yields have come down. Some of the buyers are taking a break to adjust to the new coupons."

Lackluster consumer numbers

Mixed consumer and retail data also gave the market little impetus to make a bigger move in either direction, another agency trader said.

The Labor Department said consumer prices rose 0.3% in July, the largest increase since August 2009, on the back of higher energy prices. Retail sales also gained 0.4% in July, mostly from higher auto and gas revenues.

"The takeaway is that fears of deflation may have been a little overdone, if these numbers are correct," the second trader said. "But the numbers aren't strong enough to make a clear case, so everyone's kind of just standing around and waiting to get a better picture."

GSE conference, supply ahead

Investors will be hoping for new supply after the weekend with Freddie Mac scheduled to make a calendar announcement on Aug. 18.

The agency skipped its previous calendar slot on July 29, so it is expected to sell some notes this round.

"Everybody is anticipating a three-year again because the last Fannie Mae three-year was so well received," the first trader said.

The second trader noted that the market will also be keeping an eye on the White House's Tuesday conference on the future of the government-sponsored enterprises.

"That's going to be interesting to watch," the trader said. "A lot of people are going to be doing a lot of talking, so someone might say something that will move the markets. But I doubt there's going to be anything solid coming out of it."

On the same day of the conference, the Federal Reserve will also restart its debt buying program by purchasing Treasuries, although the quantitative easing may not affect agencies as much.

"Treasury yields could go down, so you could see spreads widen a little, but I don't think it's going to have a big impact," the second trader said.

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