Agencies widen as Treasuries rally on ongoing Greece concerns; five-years underperform

By Kenneth Lim

Boston, May 23 - Agency spreads widened on Monday as the market succumbed to profit-taking and a strong performance in Treasuries.

Bullet spreads underperformed by most measurements to start the week. Two- to three-year spreads moved out by about 1 basis point versus Treasuries. Five-year securities were the biggest laggards, easing out by 2 to 2.5 bps, while 10-year spreads widened by about 1.5 bps.

"Spreads just keep leaking wider, which is bugging the hell out of me," one trader said.

The callable market was relatively quiet in what is expected to be a slow week with the usual summer doldrums and an early close scheduled for Friday.

"Today is a typical Monday," the trader said. "Not a whole lot going on today. Some reverse inquiries. But callable spreads are hanging in there."

Yields fall

Agency spreads struggled to stay tight on Monday as Treasury yields fell.

Concerns about the credit crisis in Greece, which was downgraded by Fitch Ratings just before the weekend, was cited on Monday for the strength in Treasury prices.

Swap spreads also widened slightly, but agencies were also seen to underperform swaps.

The five-year sector was particularly depressed. The trader said the pressure was more from sellers trying to cash in on recent tightness in the sector than from surprising supply out of Freddie Mac a week ago.

"I don't know of anything going on other than the market rallied to 3.09% or 3.10%," the trader said. "The five-year range is at the top of the yield curve in terms of steepness, and guys are just selling out of it to take profit."

The trader also noted that a $200 million bid list hit the Street, and half of it was traded, which could have put some pressure on the market as well.

Volatile week ahead

Traders were expecting the rest of the week to be volatile, especially with volumes muted because of the looming holiday.

There are no benchmark issuance announcements scheduled in the agency market for the week, but the Treasury has $99 billion of auctions in the two-, five- and seven-year sectors over the next three days, and that could move underlying yield levels.

The debt crisis in Europe also continues to simmer under the surface, while ongoing news about the U.S. economy could throw in a wrench at anytime.

In the meantime, agencies are struggling to keep up with rallying Treasuries.

"Agencies are just underperforming," the trader said.

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