Agencies ease outward on quiet Monday; callable deals drive volumes on reinvestment buying

By Kenneth Lim

Boston, July 12 - Agency spreads widened slightly on a slow Monday, with callable step-ups providing the bulk of the action.

Bullet spreads closed "a touch wider, with the exception of the 10-year sector, which was a touch tighter on the day," said Michael Skinner, an agency trader at Wall Street Access.

But Skinner cautioned that the widening should not be taken as necessarily a weakening of the market because trading volumes were extremely light.

"There's not a lot of flow, to be honest with you," he said.

The summer doldrums are likely to keep activity on the thin side for the next several weeks, Skinner added.

"This had all the makings of a Monday in the summer," he said. "We're now in the world of three-day workweeks. Mondays and Fridays are effectively half days."

Callables draw buyers

While bullets had a quiet session, the callable universe was bursting with life, Skinner said.

"A lot of callable [medium-term notes] hit the screens," he said.

Most of the new callable step-up issues were smaller-sized offerings.

"You didn't see any $2 billion deals but a lot of upsizes, a lot of deals hitting the tape," Skinner said. "Step-ups are still the flavor of the month."

The driving force behind the brisk issuance has become a bit of an old story. Low absolute yields and low volatility have given issuers incentives to call existing paper whenever they can. Holders of paper that have been called then reinvest their cash in new callables.

More widening possible

The market continues to trade at historically tight spreads, Skinner said.

"We're kind of at the tights, especially in five- and 10-year land," he said. "I don't know how much more room there is to go. I would think the next step would be a little bit wider."

Agencies are also currently stuck in a narrow trading range and could continue to orbit around current levels unless a significant catalyst appears on the scene. The current range-bound market is not great for trading desks.

"We need a big market mover one way or another," Skinner said. "It's not good for volumes, not good for business, not good for a lot of things."

Looking ahead, Freddie Mac has a calendar announcement on Reference Notes scheduled for Wednesday.

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