Agencies mixed as improved consumer spending, underwhelming hurricane boost risk buying

By Kenneth Lim

Boston, Aug. 29 - Agency spreads were mixed to a little tighter as equities rose on a Monday marked by extremely thin volumes in the aftermath of Hurricane Irene.

Bullet spreads closed flat to a touch narrower versus Treasuries on the day, although traders cautioned against reading too much into the numbers because of the illiquid market.

"There's not enough flow to really talk about the direction of the market," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

Callables remained in strong demand with early redemptions taking place at a brisk clip.

"Callables continue to crank along as stuff gets called and new product is being issued, albeit at a lower yield," Riley said. "To be honest with you, there's nothing else out there. The Treasury market is pretty dull and boring on the front end, and the only place you can get any yield is in steps and callables. As that stuff gets called, people put money right back into it."

Yields climb on equity gains

Yields rose across the board on Monday as equities staged a strong rally following a positive set of consumer spending data.

Consumer spending rose 0.8% in July, better than the consensus estimate for a 0.5% increase, according to the Commerce Department. The decline in spending in June was also lowered to 0.1% from the earlier indication of a 0.2% slowdown.

"The consumer spending data was rosier than expected, which supported the theory that the economy isn't as terrible as the market was pricing in a couple of weeks ago," a government bond analyst said. "That sparked a risk-on trade into equities and led yields to rise today."

A weaker-than-expected Hurricane Irene also eased some concerns.

"Ironically Hurricane Irene was a positive for the market today because it wasn't the apocalypse that some people had been expecting," the analyst said.

Quiet week ahead

Trading volumes were noticeably quiet on Monday as the hurricane kept many traders away from their desks.

"I can literally count the number of tickets that passed with one hand," Riley said.

The market is typically slow in the last week of August as many participants take time off in the final days of summer, before the Labor Day holiday. The storm over the weekend only served to make matters worse.

"There's absolutely nothing going on today," Riley said.

The markets could actually continue to remain subdued for the rest of the year as yields remain low and are expected to remain low until 2013.

"At least for the next year it will be pretty boring, except for the carry trade," Riley said. "The only volatility we're going to see is 10 years and out."

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