Agencies widen as Europe, equity drop spark flight to safe havens; trading volume vanishes

By Kenneth Lim

Boston, May 6 - Agency spreads moved sharply outwards Thursday on another wave of risk amid ongoing problems in Europe and a sudden dip in the equity markets.

Bullet spreads closed about 5 to 6 basis points wider across the yield curve, although the risk premium expanded to as much as 7 bps at one point, a trader said.

"First thing this morning...they hit the two-year securities," the trader said. "Twos were out 2 bps, everything else was out 1 bp, then the twos came back in and was tighter on the day, then obviously with the swooning stocks stuff just got really trashed."

Callable issuance was strong early in the day, but the actual interest from the market was weak amid the market turmoil.

"Nobody's looking at that paper," the trader said.

Ghost town

The market was largely quiet as continuing fears about the credit strength of Greece and Europe sent a fresh round of money fleeing from spread products.

Investors had been hoping for positive news in terms of Europe's plans to shore up debt-laden Greece, but they were disappointed when European Central Bank president Jean-Clause Trichet said bank officials did not discuss bond buybacks.

"Volumes were very, very light," the trader said.

The trader explained that investors were focused on covering themselves in other markets.

"Normally when there's high volatility in the Treasury market, people are more worried about their delta and hedging volatility," the trader said. "Agencies are the last thing they're thinking of...supra-sovereigns, FDIC, agencies never trade when something like this happens."

Stock puzzle

A sharp dip in the stock market also added more fear to a market already gripping the handrails of its roller-coaster day.

The Dow Jones Industrial Average had a sharp drop of almost 500 points within the span of just over five minutes on Thursday afternoon before recovering just as quickly to close the day down by 3.2% at 10,520.32.

Rumors emerged on Thursday that an errant order may have precipitated the drop, and the exchanges said they were investigating.

"The damage is done," the trader said. "The market was already pretty skittish before with the Greece stuff, and this just made it worse."

Friday could see investors continue to be paralyzed by nervousness, and even strong jobs data may not be enough to prompt investors to pull money out of Treasuries, the trader said.

"It's going to have to be a big, positive number for the market to trade down," the trader said. "People are not going to be short Treasuries going into the weekend."

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