Agencies flat as volatile rates keep investors sidelined; domestic concerns take backseat

By Kenneth Lim

Boston, March 14 - Agency spreads closed flat on Monday as wary investors hugged the sidelines amid ongoing Arab unrest and the aftermath of the earthquake in Japan.

"Did you hear that? A pin just dropped," said Michael Skinner, an agency trader at Wall Street Access.

Bullet spreads ended the day unchanged, although yields had a choppy session as the market struggled to make sense of the day's headlines.

Callable activity was also quiet amid the volatility.

"It's very, very quiet in both bullets and callables," Skinner said.

Uncertainty takes toll

The volatility in the market came as investors remained unsure about how Friday's earthquake in Japan would affect yields.

There has been speculation that the size of the disaster in Japan could force insurance companies to liquidate some assets in order to meet claims. One of the easiest and most liquid assets to sell would be U.S. Treasuries, and if insurance companies begin to sell Treasuries, that could raise yields, Skinner said.

On the other hand, the earthquake could have struck a blow for the global economy, and investors looking for safer assets could flock to U.S. fixed income assets and keep yields low.

"There has been a lot of two-way talk about what potentially could happen," Skinner said. "Maybe this is another external event that could cause additional slowdown to the global economy and could cause rates to rally a little bit. We've seen more of that than the liquidation scenario so far."

Skinner added that some curve steepening could be possible later, but in the meantime investors are staying away from the market volatility "rather than catch a falling knife."

When investors will feel comfortable about coming back to the market remains to be seen.

"Are we going to stay like this until June and the end of [quantitative easing]?" Skinner said. "I hope not."

FHLB ahead

The domestic economy and other more typical concerns of the market have been pushed to the backseat in the wake of the Japan earthquake, but the rest of the week could see those concerns jostling for greater attention.

On Tuesday, the Federal Open Market Committee will have its one-day meeting for the month.

On Wednesday, Federal Home Loan Banks is scheduled to announce whether it will issue new Global Notes.

"It may be a two- or three-year, or maybe a pass depending on their needs," Skinner said.

The Producer Price Index will also be released on Wednesday, followed by the Consumer Price Index and the Philadelphia Fed survey on Thursday.

"Tomorrow I assume would be somewhat quiet again, but we have major data on Thursday and Friday," Skinner said. "We really need to see where inflation is at this point."

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