Spreads unchanged as pace of development in Libya, Japan leave investors wary of big moves

By Kenneth Lim

Boston, March 22 - Agency spreads closed flat on Tuesday as investors continued to await more clarity on developing events in Libya and in Japan.

Bullet spreads ended the day close to where they began in a slow session for news.

"It was very quiet today and pretty close to unchanged across the board," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

Callables, however, had a busy session with investors taking advantage of the recent gains in yields. Callable bonds are seen as defensive investments in rising-yield environments.

"We're seeing a lot of callables" Hurley said. "The ones that seemed to be moving the greatest are those with the longest call protection, meaning a one-year call versus a three-month call."

Quiet markets

Market activity has been muted because of the slow pace of news coming out of Libya and Japan, leaving the Street in a state of limbo over uncertainty about how those hotspots will eventually settle.

"It is due to the fact that we have no really new developments out of Japan [...] and we still have situations brewing in Bahrain and Yemen and even Saudi Arabia," Hurley said. "And what surprises me is the market's not really paying much attention to the problems over in Europe with Ireland and Portugal."

A coalition of militaries, including those from the United States, France and Britain, continued to launch attacks at Libyan government forces on Tuesday, and it remained to be seen what the next step for the allies would be.

In Japan, crews continued to try to contain the nuclear crisis in the earthquake and tsunami-hit city of Fukushima. Workers had managed to reconnect all six affected reactors to a power line, but it was unclear how far that would go in restoring cooling systems that may have been damaged.

Prices and spreads were up and down all day, reflecting the fact that volatility is still high even though prices at the end of the day may not have seemed to move by much, Hurley said.

Yields still in range

Absolute yield levels remain stuck in a trading range, but are currently hovering near the lower end, Hurley said.

"We're down closer to the lower end of the trading range in yields and higher end of the Treasury range in prices, but if things get worse, we could add to the gain in prices here," Hurley said. "The next resistance is around 3.27% in the 10s."

The rest of the week looks to be light on the economic data front, so the overseas concerns should continue to dominate market concerns, Hurley added.

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