Agency spreads widen dramatically by up to 30 bps; Fed will continue buying Treasuries

By Lisa Kerner

Charlotte, N.C., March 15 - Agency spreads moved dramatically on Tuesday, ending the day wider by 10 basis points to 25 to 30 bps, according to Mary Ann Hurley, vice president of fixed-income trading for D.A. Davidson & Co.

Hurley, who called the movement unusual, saw the biggest change in the seven-year sector. Two-years moved out about 10 bps.

"There are some buyers on the dip," said Hurley, even with yields down and little activity.

Treasuries widened "almost to a straight line today," she said.

People want to own Treasuries, Hurley said, because they "give you the biggest bang for your buck" and investors want to be "in a safe haven."

Rather than making a "flight to quality," investors now seem to be making a "flight from disaster" given the aftermath of the earthquake and tsunami in Japan, said Hurley.

Hurley believes agencies will improve and once Japan is stabilized, Treasuries will decline much more rapidly than agencies.

Fed optimistic about economy

The Federal Reserve's Federal Open Market Committee, led by chairman Ben Bernanke, released a statement from its one-day meeting that was held on Tuesday.

Information obtained since January suggests that "the economic recovery is on a firmer footing" and that conditions are gradually improving in the labor market despite an elevated unemployment rate, according to a committee news release.

The committee noted that concerns about global supplies of crude oil "contributed to a sharp run-up in oil prices in recent weeks."

The committee said it is maintaining its existing policy of reinvesting principal payments from its securities holdings. It made no changes to its plans to buy $600 billion of longer-term Treasury securities by the end of the second quarter.

The committee will maintain the target range for the Federal Funds rate at 0% to ¼% and expects the rate to remain at exceptionally low levels "for an extended period."

Hurley said she was surprised that the committee did not mention anything concerning risk or Japan, which certainly will have a global impact.

"They didn't really highlight any particular risk to growth, said Hurley.

While the committee didn't paint a rosy picture, "they painted an improving picture," she said.

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