Across the Curve

An Intersting Piece on Agency Spreads

Another piece from a dealer which delineates the extent to which agency spreads have moved versus Treasury benchmarks and Libor.

What a week in Agencies. 2s, 5s, 10s, 30s have widened 56bp, 46bp, and 62bp, and 82bp, respectively, to the widest asset swap levels on record: L+86, L+71,  L+155, and L+228. The NY Fed data released yesterday afternoon shows another huge reduction in Agency debt and MBS held for overseas investors. Of the $1.7tn in GSE debt and MBS held by overseas accounts, $885bn is held in these accounts. The decline in holdings for the week ending Nov 19th was $11.7bn, which is the 3rd largest drop on record, second only to Oct 15th (-18.6bn) and Oct 8th (-24.4bn). Although the Fed data does not break down by region, we can see in the TIC data (which appears with more of a time lag) that Asia has been the significant seller, with China the largest component. TIC data shows that Asia sold 12bn in Sep, 14bn in Aug and 16bn in July, with China accounting for 7.7bn, 7.1bn. and 3.4bn, respectively. September was a record month for net sales out of China. This is a very significant change in flows (chart attached) which has overwhelmed the buying interest we’ve seen from domestic real money.