Agencies flat amid volatile session; investors afraid to get toes wet amid uncertainties

By Kenneth Lim

Boston, Jan. 21 - Agency spreads closed flat on Friday as investors mostly kept to the sidelines amid another volatile day for rates.

Bullet spreads ended unchanged against Treasuries on the day, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"Real quiet day today, not a lot of activity," he said. "Spreads are going out right where they went yesterday."

The market was jostled a little during the day with Treasuries falling in price in the morning before staging a mild recovery in the afternoon.

"It was a little volatile during the day," Riley said. "[Treasury] 10s tanked all the way down to 93 to the buck, and they're now back to 93.18, so it was a little bit of a wild ride in Treasuries, and agencies of course reacted in similar fashion."

The one positive for agencies was that the market held its ground versus swaps.

"Agencies are holding up against swaps," Riley said. "They gave up some ground last week in the heavy trading volatility, and ratcheted back 2 to 3 basis points versus the swap curve, so we're in OK shape."

Uncertainties take toll

Investors continue to hug the sidelines of the market because they are not sure what lies ahead for rates, Riley said.

"I think people are concerned that interest rates are about to go up, but probably there's an equal camp that thinks we're due for a rally here," he said. "I think that's keeping a lot of the activity down."

Real money investors, who usually buy for yield, would rather do nothing than make a mistake.

"Real money accounts seem to be comfortable holding what they own based on the theory that if I sell what I have, what do I replace it with?" Riley said.

The fixed income markets are in an unusually long period of stagnation, he added.

"We've been in a trading range in 10-years of about 3.25% or 3.26% to 3.5%, and we have maintained the trading range for a month, which is a fairly long time to be in a fairly tight trading range," Riley said. "Everyone's waiting to see if we break to a new lower yield trading range or a higher yield trading range. I haven't got a strong conviction either way."

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