Agencies end flat amid dry outlook for new supply; traders hope for month-end activity

By Kenneth Lim

Boston, March 28 - Agency would not budge on Monday as a dry supply pipeline discouraged active trading.

Bullet spreads closed the day unchanged from Friday, an agency trader said.

"It was a very quiet day as far as I could tell," the trader said. "Five-years are exactly unchanged. Some of the seven- and six-year stuff is maybe 0.5 basis point tighter but nothing that I'd describe as meaningful flows."

Callable activity was slightly better, with buyers eager to get their hands on any issue that seemed attractive.

"We saw some good buying today," the trader said. "The market's selloff in the last couple of days will probably slow that down a little bit"

The trader said funding levels are not that much more appealing for callables at the moment, and that could also lead to tighter supply in callables.

"Opportunities are far and few between," the trader said. "Any time we have an interesting issue out there, people tend to move very quickly because people know it's going to be very hard to get any supply."

Treasuries slip

Absolute yield levels rose on Monday as Treasury prices fell following a weak auction of two-year Treasuries. The volatility in Treasuries drew most of the market's attention, and agencies took a back seat, one sellside source said.

"It's going to be a busy week for Treasuries," the sellside source said. "You have auctions the next three days; then on Friday you have non-farm payrolls. Agencies typically aren't on the top of the agenda for most investors on weeks like this."

Fannie Mae's decision not to use its March 24 calendar issuance slot also led to a sharp tightening of spreads before the weekend, and investors are now reluctant to either buy or sell, the trader said. The next calendar supply on the horizon is on April 5.

"Spreads are still very tight," the trader said. "Everyone realizes that, based on Fannie Mae passing last week, we're not going to get much supply, and people got a little bit uptight. A lot of buyers don't want to buy at these levels, and on the flip side a lot of sellers are not willing to sell."

Month-end ahead

The trader was hopeful that volumes could pick up as the week progresses because of the month- and quarter-end.

"There's always some month-end rejigging going on," the trader said. "I understand this month there's a big extension in the Treasury market, which may draw some attention away from agencies, but we do tend to see a lot of activity usually around month-end."

The sellsider said some investors could be interested in buying if there is a big enough gain in absolute rate levels or widening in spreads before March 31.

"I think you're more likely to get higher absolute yields this week and wider spreads," the source said. "Some of the absolute rate buyers out there could still be looking to balance their portfolios, although I think most of them bought what they could last week."

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