Agencies widen as disappointing payrolls send money to safe havens; bargain hunters wary

By Kenneth Lim

Boston, Aug. 6 - Agency spreads widened on Friday as weak payroll data sparked a flight of money toward safer Treasuries.

Bullet spreads closed about 0.5 to 2 basis points wider on a sharp rally in Treasuries on Friday.

"Spreads are wider across the curve," an agency trader said. "Twos and threes widened about 0.5 to 1 bp. Fives and sevens did the worst; they were out about 1 to 2 bps on the day."

Callables quieted down a little with the broader market, the trader said.

"Callables have been doing well, but everything kind of slowed down a little today," the trader said. "Issuance was down a little today, but I wouldn't read too much into it. We're still seeing very strong demand for callables, and I think that theme's not going to go away."

The market in general had a lackluster day, the trader said.

"Not a lot of activity today, even with payrolls," the trader said. "[It's a] typical summer Friday, and yields are extremely low, and buyers are a little bit reluctant to buy at such low yields."

Payrolls spark flight

Spreads took a hit on Friday largely because July payroll and unemployment numbers disappointed the market.

The Labor Department said Friday that non-farm payrolls fell by 131,000 in July, while the unemployment rate stayed flat at 9.5%. Private payrolls increased by 71,000.

"Obviously the big news today was payrolls," the trader said. "People were expecting private payrolls to increase by about 100,000; it turned out to be 71,000, so obviously the market was disappointed.

"We saw some flight to quality on the back of that. Treasuries rallied. Spreads are wider across all risk products as a result of that."

Dip buyers wary

Investors who would normally have sought bargains by buying on wider dips were reluctant to come out Friday, the trader added.

"I think first of all this was a flight to quality kind of situation, so the spreads are pretty reflective of the fact that people just aren't comfortable holding on to anything riskier than Treasuries right now," the trader said.

Absolute yield levels are also extremely low, which means that agency bullets are considered rich.

"Yields are low, so even if the spread is a little wider, you're still not getting a great return," the trader said. "And spreads themselves are also very tight historically, so even though we widened out 2 bps today, we're still 21 bps over three-year Treasuries."

Spreads could see a bit of tightening after the weekend, the trader said.

"We could get a bit of a correction in Treasuries after the weekend, so there could be a bit of tightening on Monday, but any correction is probably going to be a small move, and volumes aren't going to be noteworthy anyways," the trader said.

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