Agencies unchanged in quiet session amid mixed payrolls data; supply, profit taking eyed

By Kenneth Lim

Boston, July 2 - Agency spreads closed flat on Friday on quiet volumes as non-farm payrolls data came mixed.

Bullet spreads were unchanged on the day, an agency trader said.

"Really not much going on," the trader said. "Non-farm payrolls was kind of an anticlimax."

But agency investors took comfort in knowing that their holdings were heading into the weekend relatively tight versus Treasuries, the trader added.

"Agencies have been holding up pretty well with the [Treasury] rally," the trader said. "They've kept up with Treasuries and on the whole they've outperformed swaps, so it's not a bad place to end the quarter."

Trading volumes, however, were extremely thin on Friday because many traders and investors were simply not at their desks. Monday is the Independence Day holiday.

"Nothing's going on today," the trader said. "People are thinking about how they're going to spend the weekend, going home early. I haven't done a thing all day."

Callable activity on Friday was also slow because of the coming holiday.

It's the "same story in callables," the trader said. "Nobody's issuing - no inquiries, no bids."

Anticlimactic payrolls

Investors woke up on Friday concerned about how non-farm payrolls data would look, but the reported numbers seemed to paint a mixed picture that left market sentiment in neutral.

The U.S. Labor Department reported that non-farm payrolls fell by 125,000 in June, although that included a 225,000 decrease due to temporary Census-related work that ended. Private employers added 83,000 jobs in the month, fewer than the 112,000 that the Street had been expecting.

But the unemployment rate beat expectations, dropping to 9.5% compared to analysts' estimates of about 9.8%.

The drop in employment suggested that the U.S. economy is still fragile, but investors were already expecting the numbers to be weak, the trader said.

"What happened over the course of the week was people's expectations just kept getting lower and lower," the trader said. "It's hard to disappoint the market. So I think on the whole most of it was already priced in, and the numbers were a little disappointing in some parts, a little positive in some parts."

Supply, earnings ahead

The trader said the market should begin to pick up again after the long weekend.

Investors will be looking toward corporate earnings to get a better sense of how the domestic economy is doing. More specific to agencies, Fannie Mae on Wednesday will make the first benchmark issuance announcement in about two weeks.

"Everyone's hungry for supply," the trader said.

But the agency market could come under some widening pressure as the third quarter starts to pick up.

"Supply is one factor," the trader said. "The other factor is just profit taking. I think we're a little too tight."

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