Agencies flat ahead of new supply; tight spreads, possible rates volatility curb activity

By Kenneth Lim

Boston, April 11 - Agency spreads continued to tread water on Monday, with investors reluctant to make any moves amid tight spreads and possible supply later in the week.

Bullet spreads closed the day flat, with benchmark five-year spreads hovering around 24 basis points over Treasuries, an agency trader said.

"It's been a whole lot of nothing today," the trader said.

The callable market was dominated by step-up deals, said Guggenheim Partners head of agency trading Mike Goldman.

There were a lot of step-ups, he said.

"They sort of come and go, but that is the game right now, with spreads so tight right now," he said.

Weak volumes

The agency market remained plagued by a drought of activity. Goldman said that at current spreads, it was difficult to find an attractive entry point.

"Not at these spreads," he said. "It's hard for me to justify the risk and reward profile here."

The market could be bracing for some volatility on the yields front as investors eye $66 billion of Treasury auctions over the next three days, although the impact on spreads is not clear.

Goldman said spreads could possibly tighten if Treasury yields rise in the face of the supply, which will come in the three-, 10- and 30-year sectors.

The other trader said any impact on spreads would probably be limited.

"On a short-term basis, it's had a very low correlation with agency demand," the trader said. "I think on the margin it would maybe take away some of the focus on agencies."

FHLB ahead

Investors were also eyeing potential agency issuance from Federal Home Loan Banks, which is scheduled to make a calendar announcement on Wednesday.

"I'm not hearing anything on Home Loans," Goldman said. "I think there's a reasonable chance that they don't do anything."

The other trader said he was a little more optimistic about a deal from FHLB.

"I think it's 50-50," the trader said. "You got three-years at Libor minus 9 bps, and that's right around where they get interested. If they are convinced that they can get a quick sale...they might do it."

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