Agencies end flat, follow Treasuries as curve steepens on yen intervention; volumes flat

By Kenneth Lim

Boston, Sept. 15 - Agency spreads closed unchanged on Wednesday as the market followed the lead of Treasuries in reacting to the Bank of Japan's intervention to devalue the yen.

Bullet spreads closed flat to 1 basis point wider across the yield curve, an agency trader said.

"We were pretty much flat at the front end," the trader said. "Further out on the curve I'd say we were a touch wider."

The day's trading was slow, the trader added.

"Most of the attention is elsewhere in corporates and Treasuries," the trader said. "Agencies are sort of just waiting for the next supply in bullets or just reinvesting in step-ups."

Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co., said callable issuance was brisk.

"We've had a fair amount of issuance," she said. "A lot of stuff continues to be called, so there is a lot of demand for that paper, just as a replacement for calls and just in place of Treasuries or bullet agencies, which are definitely more expensive compared to the callables."

Intervention steepens curve

The overall yield curve steepened on Wednesday after the Bank of Japan bought dollars and sold yen to try and bring down the value of the Japanese currency.

The expectation is that Japan will focus its buying efforts on front-end dollar-denominated assets, Hurley said.

"That certainly is helping the shorter end of the market because if past history holds, they generally reinvest the proceeds in the shorter end of the Treasury market," she said. "So we had a steepening of the yield curve."

Hurley said longer-end yields also rose because investors switched out of longer-dated maturities into the front end.

Low yields mute volumes

The continued Treasury rally on Wednesday put a damper on trading volumes, the other trader said.

"A lot of money is waiting for rates to back-up because yields aren't attractive at these levels," the trader said. "It looked like there was an opportunity with the sell-off last week, but that hasn't been the case this week."

The drop in yields has been blamed on high corporate issuance and continued concerns about the economy, the trader added. While corporate issuance might abate, economic fears could persist.

"It's not good for business," the trader said.

There was also a bit wait-and-see on Wednesday ahead of Thursday's jobless claims report and Friday's consumer sentiment and consumer price index data.

"There are so many things happening, I think there's some truth to the idea that there's a bit of paralysis right now," the trader said. "Some investors want to see the data before doing anything major."

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