Agency spreads flat as volumes spike; sellers on Fed's departure find extension buyers

By Kenneth Lim

Boston, March 31 - Agency spreads ended unchanged on Wednesday as the end of the quarter drove up trading volumes.

"Today was a big day," said Christopher White, senior vice president of fixed income sales and trading at Moors & Cabot Capital Markets. There's "a little bit of a line of demarcation that the Fed has ended its buyback program."

Bullet spreads closed flat, White said.

"Spreads today are...basically flat for the day, so they outperformed swaps," White said. "Swap spreads have been all over the place. Five-year swaps are wider by 4 basis points. They went from 31 bps to 9 bps and are now back to 17 [bps] in the past three weeks."

High volumes

An agency desk analyst said Wednesday's activity was healthy because there was a surge in both buyers and sellers.

"There are a lot of people who are buying because of large index extensions...but you have people who say I want to get out of agencies on March 31 because I know the Fed is leaving," the analyst said. "It's kind of nice that the extensions are large on a day when you think everyone wants to sell."

White reported about $1.5 billion in trades on Tradeweb.

"There's not a lot of size, but you saw a lot of $10 million to $20 million pieces," White said.

The sellers were the first off the blocks, carrying on the widening momentum from the first two days of the week. But the buyers were quick to follow later in the day.

"You did see some net selling, especially in the morning," White said. "Once the Fed stops buying, let's unwind those positions. And conversely, you've probably seen a fair amount of buying in extensions and things like that."

Weaker week

The wave of activity on Wednesday came after a quiet start to the week.

"It's been a strange week," White said. "Monday was very, very low volumes...yesterday was actually pretty active in agencies, and we saw some buying in the front end from commercial banks. Today you've seen more of a reflection of a fair amount of buying and a fair amount of selling."

Compared to where the market left off just before the weekend, agency spreads are still wider, White said.

"Now it's still wider than when we started the week," White said.

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