Agency spreads outperform swaps, end wider on day impacted by Middle East unrest

By Lisa Kerner

Charlotte, N.C., March 10 - Agency spreads ended Thursday wider by 1.5 basis points overall and the same in the five-year sector, according to Michael Skinner, agency trader with Wall Street Access.

Another trader saw spreads wider by ½ to 1 bp on the day and said swaps outperformed agencies, ending wider by 1 to 1.5 bps.

Callables tightened on Thursday, said Skinner.

The lack of activity in agencies contrasted with a sharp rally in the rates market, which was up "a lot, especially in the 10-year," the trader said.

Agency issuance activity is very light due in part to a reduction in portfolios, according to the trader.

The trader was only a little surprised by Freddie Mac's decision to not issue Reference Notes this week but said the move is "symptomatic" of the agency's funding needs.

Nice gains were seen in the equity market, which Skinner predicts will result in rebalancing for some investors.

Skinner said Treasuries started strong on Thursday, while stocks were down - a situation that somewhat reversed itself later in a day punctuated by a strong midday bond auction.

Stocks would slump by day's end, impacted by unrest in the Middle East, particularly in Saudi Arabia.

Turmoil has made the world a scary place, which affects investing, Skinner noted.

"We have had a good run in the last two years. Investors seem to be taking a step back, looking at where the world is now," Skinner said.

Also on Thursday, the U.S. Bureau of Labor Statistics released unemployment rates for January. The national jobless rate fell by 0.4 percentage point between December and January to 9%, 0.7 point lower than in January 2010.

Twenty-four states saw their unemployment rates fall in January, 10 states saw their rates increase, and 16 states had no change.

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