Agencies widen, quiet as State of the Union, Fed meeting loom; month-end pick-up hoped for

By Kenneth Lim

Boston, Jan. 25 - Agency spreads followed swaps wider on Tuesday on quiet trading as wary investors awaited policy-related announcements over the next couple of days.

Bullet spreads widened by about 1 basis point across the yield curve, an agency trader said. The agency market did not really have a major market-moving headline during the day, so investors were taking the cue from swaps, which widened out.

"Spreads are marginally wider by about 1 bp or so, nothing major," the trader said.

Callable volumes continued to linger on the light side of average.

"We had quite of few callable issues in the market today, but not a tremendous amount of activity," the trader said. "Spreads are widening out."

Treasury supply shrugged off

Market reaction to an average Treasury auction of two-year notes was muted, another dealer said.

"I guess you could consider the auction decent," the dealer said. "It was really kind of in the middle. It wasn't bad, but it wasn't a terrific auction."

The dealer said investors across fixed-income markets were cautious about making major moves ahead of President Obama's State of the Union Address on Tuesday evening. There will also be headline risks on Wednesday, when the Federal Open Market Committee releases a statement at the conclusion of its two-day January meeting.

"There isn't much going on anyway, so people can wait a couple of days before they come back to trade," the dealer said. "I guess they'd rather wait than be caught with the wrong positions, especially with the month-end just a few days away."

The other trader noted that January tends to be a little slower for agencies anyway.

"I don't know if it's just a typical January as accounts are trying to determine where their needs are, but this feels like a longer kind of month than I was expecting," the trader said. "We've been kind of range-bound for most of January, so there's been no real impetus for accounts to do anything."

Month-end activity possible

The dealer said there could be a pick-up in activity after Thursday's final Treasury auction because of month-end trades that have been put off due to the market events on the calendar.

"I think there's definitely some pent-up demand out there," the dealer said. "Some people want to square off their positions before the end of the month, but there's not enough liquidity in the market right now. If we can get a little bit more visibility in rates, I think you'll find a lot of money coming off the sidelines and back to business."

Thursday's volumes could also get a boost if Fannie Mae decides to issue new Benchmark Notes, the dealer said. Although additional supply would normally push spreads wider, when the market is as illiquid as it is right now, the increase in activity could also spur bids, the dealer said.

"It's positive if you get people to look at agencies," the dealer said.

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