Agency spreads close flat with spotty buying at front end; market awaits Treasury supply

By Kenneth Lim

Boston, April 21 - Agency spreads ended the day mostly unchanged as trading activity remained sluggish ahead of Thursday's Treasury supply announcement.

Two-year bullet spreads closed about 0.5 of a basis point tighter on the day, while three-year spreads ended the day flat. Spreads on agency paper five years and longer eased out by about 1 bp.

Trading volumes remained thin, as they have been all week, although some buying was seen at the front end of the yield curve early in the day.

"The front end's still the most active," said Craig Ziegler, an agency trader at Broadpoint. "There were better buyers, better activity in the morning. I would say that we had some buying of two-years."

Volumes got a slight boost on extension trades from three-years out to four- and five-years. The Treasury curve also flattened significantly as expected Treasury supply next week weighed on shorter-term Treasury prices.

"It's been a quiet week," Ziegler said.

Callables pick up

Callable trading activity picked up after a slow start to the week, but again the front end of the curve was where most of the action took place.

"Callables were pretty active, mostly at the front end," Ziegler said. "Three-years and in were the most active. [There were] not a lot of big issues...and most were ranging out to five years."

Late start possible

Despite a slight improvement in volume, Wednesday' agency market still showed signs of lethargy, Ziegler said.

"As the market rallies and spreads tighten in, guys are kind of reaching for products," he said. "It's not so much new buying, I think it's more of customers don't have to do much, but when they get some money in, they have to find somewhere to put it."

The agency market has been extremely quiet, with Freddie Mac's $1 billion reopening of three-year Reference Notes on Tuesday disappointing those who had been hoping for a bigger deal. The next issuance is not until April 29 with Fannie Mae.

But the Treasury's Thursday announcement of its issuance plans for the coming week could catalyze a spike in trading.

"There's no economic news this week, so guys are just waiting for anything," Ziegler said. "Tomorrow starts the action. The rest of this week has been just warm-ups."

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