Agencies end flat as FHLB passes on issuance; Greece, thin supply keep yields, spreads low

By Kenneth Lim

Boston, May 16 - Agency spreads closed unchanged Monday as Federal Home Loan Banks skipped an issuance opportunity, leaving the market with little impetus to move ahead of a slow week for data.

Bullet spreads ended flat on the day versus Treasuries, traders said.

"It's one of those dead days," said Mike Goldman, head of agency trading at Guggenheim Partners. "There were no trades."

The callable market also had a quiet session.

"There were some deals today, but it wasn't what I'd call a large-volume day," Goldman said.

There were about 40 new callable deals on his screen, but most were around $25 million offerings, he said.

"Very, very small deals," he said.

Michael Skinner, an agency trader at Wall Street Access, said the callable market has nevertheless been seeing a large amount of redemptions, which could boost future demand as investors seek to reinvest money from old paper that has been called.

"I thought it was a better sign for business," Skinner said. "I'm sure a lot of them would rather do it when 10s were at 3.60%, but the fact is they have to put that money to work at some point."

Yields decline

Agency yields followed Treasuries lower, meaning prices were up, as persistent concerns about the debt crisis in Greece led investors to shed some risk.

"It seems these days that we're watching Greece pretty intently," Skinner said. "We're watching commodities and stocks, and that kind of seems to be what's driving the markets."

Bullet spreads remained relatively tight, but the richness in the market is largely due to a lack of supply, Skinner reckoned.

"Every time we have a back-up in spreads, there will be people looking to buy," he said.

Skinner expects spreads to hold even after the current round of quantitative easing stops at the end of June because some of the money that left to seek better yields in commodities and other asset classes could return.

"There's a lot of hot money that went to some of these commodities and are now going back," he said. "I'm not super bullish on spreads or yields, but I think they're going to be unchanged to a little bit better."

FHLB skips issuance

FHLB said Monday that it would not issue new Global Notes this week, meeting the market's expectations.

The agency's next issuance slot is on June 8.

Skinner said he was not surprised by the move and noted that the market has been trending toward less bullet issuance as the housing market continues to struggle and Fannie Mae and Freddie Mac face federal requirements to reduce their portfolios.

"We don't have much supply anymore," he said.

Investors were keeping an eye out for the rest of the week's housing data, with housing starts on Tuesday and existing home sales on Thursday. The weekly jobless claims numbers should get the usual level of scrutiny, but otherwise the week ahead looked to be light in terms of economic news, Skinner said.

"We've got [Federal Open Market Committee] minutes on Wednesday...then the [Philadelphia Fed Survey] on Thursday, so not a terribly interesting week," he said.

The market seemed to be already on a slower summer schedule.

"It's like summer already," Skinner said. "Mondays and Fridays are going to be non-existent and all the trading's going to be done on the rest of the weekdays."

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