Agencies mixed as supply remains stagnant; profit-taking seen in the two- and three-year sectors

By Lisa Kerner

Charlotte, N.C., July 19 - Agency spreads ended the day on Monday mixed for one trader, who said the three-year and under sectors were wider by 1 basis point while the five-year and out sectors were tighter by 1 bp.

Spread-wise, agencies traded a little softer versus Treasuries and a little weaker than swaps, the trader said.

Another source said that agency spreads moved in "drastically." He said that while the two- and three-year sectors were unchanged, the five-year sector moved in by 2 bps and the seven- to 10-year sectors also tightened by 2 bps.

Both the trader and the source agreed that Monday was not very exciting. The trader cited the lack of a real catalyst for activity and said being in the midst of the summer season could be partly to blame for the slump.

There is buying in the five-year, where supply is lacking. "Accounts are taking profits in the two- and three-year," the trader said, noting the all-time-low yields in Treasuries.

Huge redemptions are making the callables market challenging.

The source said called bonds are being replaced with new issue callables due to a rally in the rates markets.

"People are just letting some paper go," said the trader, who called the current environment "rate filling."

Neither the trader nor the source predicted much change for the early part of the week, except for an announcement on Tuesday from Federal Home Loan Banks that is expected to affect supply.

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