Agency spreads widen on long end; investors holding on to cash until Bernanke speaks Friday

By Lisa Kerner

Charlotte, N.C., Aug. 23 - Agency spreads widened on Tuesday by 2 basis points to 4 bps on the long end and tightened by 10 bps to 12 bps on the short end as investors took flight to the short end of the curve.

Overall flow was good, with demand seen in the five- to seven-year sector and a general lack of supply in the 10- to 15-year sector, said Michael Gladden, director of fixed income strategy for Mischler Financial Group.

According to Gladden, longer-duration, dated callables widened to create interest as the Treasury market dropped.

Stocks rallied after Tuesday afternoon's earthquake centered in Virginia, with the bond markets selling off the most in the day.

Mary Ann Hurley, vice president of fixed-income trading for D.A. Davidson & Co., found Tuesday to be relative quiet, with agency spreads "a smidgen" wider.

Hurley had "no problem getting twos done" but found deals with "fives and sevens" - further out on the curve - more difficult to get done.

There is a lot of money on the sidelines waiting to be reinvested, according to Hurley, money that won't be committed to lower yields.

That's why Hurley, like many investors, is waiting to hear what Federal Reserve chairman Ben Bernanke has to say on Friday at the Federal Reserve Bank of Kansas City Economic Symposium. The meeting will be held in Jackson Hole, Wyo.

"Last year he laid the foundation for what turned out to be QE2," said Hurley, adding that with global growth slowing, will he be able to once again pull a rabbit out of his hat?

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