Agencies narrow on quiet trading as payrolls beat expectations; spreads could last: trader

By Kenneth Lim

Boston, Sept. 3 - Agency spreads tightened on Friday amid a selloff in Treasuries following a better-than-expected labor report.

Bullet spreads narrowed by about 2 to 3 basis points, said Craig Ziegler, an agency trader at Gleacher & Co.

"We saw pretty good moves, and everything's closing out pretty smooth," he said.

The market was noticeably quieter, especially in the afternoon, as many investors left early for the three-day weekend.

"Spreads are tighter on slower volumes," Ziegler said.

Agencies also did better compared to swaps, which did not tighten as much. But Ziegler said the tightness in agencies could also be a reflection of a lack of liquidity due to the holiday slowdown.

The markets will be closed Monday in the United States for the Labor Day holiday.

"Swaps were tighter by 1 to 2 bps, so definitely outperforming," he said. "That could just be a factor of liquidity as well. We could be a little overdone because of that."

Payrolls increase

Private-sector payrolls rose by 67,000 in August, beating Street expectations, while the same metric for June and July was revised upwards, according to the U.S. Labor Department. But the unemployment rate gained to 9.6% in August from 9.5% in July.

"It was obviously a little better than what people were expecting," Ziegler said.

The data led to a jump in Treasury yields, which helped to narrow the gap against agency rates.

But Ziegler cautioned that the data was not all rosy.

"If you look at the unemployment rate, it still ticked up higher," he said. "I think when people analyze the data a little bit more, it won't prove as favorable. I wouldn't be surprised if equities give up a little bit of their gains after the weekend."

Spreads could hold

Ted Ake, managing director of U.S. Treasury and agency trading at Societe Generale, said spreads could hold as the November elections approach.

"If we don't go into a wholesale bear market, which I think we are unlikely to, agency spreads will hold," he said. "There's not much agency supply, people are definitely looking for yield, so under the assumption that we don't go into just a nasty bear market, in which case spreads should widen, I think buying spreads is a good idea."

Ake said the market is rich on an absolute yield basis, but compared to other assets agencies still look decent.

"Three- to five-years sector doesn't look that rich to me on a spread basis," he said.

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