Agencies recover from early widening to close flat in quiet session; Europe fears hurt swaps

By Kenneth Lim

Boston, Nov. 24 - Agency spreads eased back from early widening on Wednesday to end flat to slightly slacker versus Treasuries.

Bullet spreads closed about 1 basis point wider in the two- to five-year sectors, while further out on the yield curve spreads closed mostly flat.

"We started out the day softer, particularly in the front end, because swaps were widening out," an agency trader said. "We basically tracked swaps for a good portion of the day."

Trading volumes were quiet, with markets mostly focused on the Treasury's auction of seven-year notes. The auction ended at 1 p.m. ET, and activity fell off a cliff shortly after that.

"Fairly light trading," the trader said. "Not a lot of flows. Most of the Street was in for the seven-year auctions, and once that was done it was time for the holiday."

The markets were scheduled to be closed Thursday for Thanksgiving and to close early on Friday.

Early underperformance

Mounting concerns about the credit stability of some European countries, especially Ireland, pushed swap spreads wider on Wednesday, and pulled agencies along.

Two- to three-year swap spreads moved out by about 1 to 2 bps in the morning. Five-years were initially wider by about 3 bps on the roll.

"The five-years rolled, so we captured about a 3 bps roll," the trader said. "We were at times 3 bps wider, but now we're 1 wider, which is a pretty good rebound."

But bidders appeared to come back later in the day, although the low volumes could have exaggerated moves.

Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial, said there was "a bit of buying and swapping" later in the morning after the initial widening.

The three-year sector also saw good buying interest.

"We were told there was a big buyer in three-years, although we didn't see it ourselves," Riley said.

Post-holiday pickup likely

The agency market's afternoon recovery was aided by the Treasury's $29 billion auction of seven-year notes, which went poorly.

The notes sold at a stop-yield of 2.253% and a bid-to-cover ratio of just 2.63 times, and put pressure on Treasury prices.

The market was expected to remain quiet on Friday's half-day session, although volumes should improve after the weekend, Riley said.

"It usually does," he said. "We usually get a bit of a pick-up right after Thanksgiving for a couple of weeks, then we get into the Christmas doldrums and it quiets down again."

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