Agency spreads widen as jobless claims disappoint; market seeks clarity at GSE conference

By Kenneth Lim

Boston, Aug. 12 - Agency spreads widened a touch on Thursday as poor jobless claims increased risk aversion in the markets.

Bullet spreads closed about 0.5 basis point wider across the curve, an agency trader said.

"For the day, spreads marginally widened about 0.5 bp," the trader said. "But that's reflective of the rolls. Optically they may look a basis point wider, but they're really about the same."

Another dealer said callable activity remained strong on Thursday, as step-up structures continued to be active.

"Interest has definitely picked up with the low yields," the dealer said. "It's one of the easiest and most defensive ways to pick up some yield."

Trading volumes were on the slower side, the dealer said.

"Activity slowed down a little today," the dealer said. "All the supply's out of the way, guys are starting to wind down for the week. Tomorrow's going to be even quieter."

Claims add to fears

The market took a bit of a hit on Thursday after the Labor Department said new jobless claims rose by 2,000 to 484,000. Economists had been expecting a drop in claims.

"I think that kind of pushed most spreads wider, whether you're talking about agencies or corporates," the dealer said.

The poor claims data was not entirely a surprise, the dealer noted.

"Everything is pointing to an economy that's going through a rough patch right now," the dealer said. "I think some people may have been a little over-optimistic, which is why spreads were a little softer today, but on the whole I don't think it's a big surprise."

The other trader felt that agency spreads were simply going through a small correction, but the market should continue to tighten slowly.

"Ever since the delisting of Fannie Mae and Freddie Mac, the initial kneejerk reaction was widening for about 15 minutes, then they've been tightening since," the trader said. "Agencies have been on a non-stop tightener for a month or so, and there's really nothing in the way to interrupt that structurally."

Supply has also dried up, the latest being Federal Home Loan Banks, which passed on a calendar slot on Wednesday. All the agencies are well-funded and do not have huge fundraising needs.

"The existing portfolios seem to be well funded at the agencies," the trader said.

Data, conference ahead

The dealer said investors on Friday will be watching economic data on the Consumer Price Index and retail sales numbers, although Street expectations are for more of the same.

"I think it's going to be just a reinforcement of what we already know," the dealer said. "I don't think we're going to get much of a surprise there."

The trader said the market could get a bit more direction after the weekend, when the White House will organize a conference to look at the future of the U.S. housing finance system. The conference takes place Aug. 17.

The conference may not clear up all the uncertainties about the future of the government-sponsored enterprises, but it could at least yield some hints of what major players are leaning toward, the trader added.

"What we'll get is a sense of what they're thinking," the trader said.

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