Agencies unmoved as key data, supply drought keep volumes thin; spreads seen to hold tight

By Kenneth Lim

Boston, March 31 - Agency spreads closed mostly flat on Thursday as investors remained wary of making any big moves ahead of Friday's key payrolls and unemployment data.

"Spreadwise they're pretty much unchanged to maybe 0.5 basis point tighter on the shorter end, and maybe 0.5 bp wider on the longer end," said Mary Ann Hurley, a trader at D.A. Davidson & Co.

Callable activity picked up slightly.

"We've been seeing some decent buying in the three-year callable area with call protection," she said.

Trading volumes remained muted, as they had been all week, another trader said.

"It's been extremely quiet," the trader said. "The market was too busy keeping an eye on rates to think about agencies. Between the auctions and tomorrow's payroll and unemployment, the last thing anybody's thinking about is agencies."

Payrolls ahead

The market's current focus is on Friday's employment situation report of non-farm payrolls and the unemployment rate.

"Those are very important pieces of information for the market," the trader said. "If we get a strong reading tomorrow, or a weak reading, we're going to see a violent move in rates."

The market on average is expecting an improvement in the employment situation, but there is not much confidence about the Street's expectations.

"We've been getting data on both sides of the mean, so it could go either way," the trader said. "Nobody's confident enough to go out on a limb on this one. Nobody wants to be a fool on April Fools.'"

The agency market is experiencing some inertia as the week's lack of supply kept spreads tight and reduced any sense of urgency among investors to trade. The market is also modest in its expectations of supply in the week ahead, when Freddie Mac has a calendar announcement on April 5.

"When spreads are as tight as they are, especially at the front end, they just don't move as much," the trader said. "And there's no supply in the picture to pressure spreads."

Up-and-down quarter

Agency spreads are ending the quarter just slightly wider from when they began, the trader said.

"It's been an interesting quarter," the trader said. "We saw some good tightening at the start of the year after the Treasury announcement on Fannie Mae and Freddie Mac, then we widened back out as Treasuries started to really take off. Just the past couple of weeks we tightened again because of the Fannie Mae announcement [on skipping its issuance slot on March 24]."

But the trader expects agency spreads to ease out slightly over the next few weeks.

"The supply crunch that we're facing is temporary, so I expect to see some selling once the supply pipeline comes back, and it's going to come back," the trader said. "It's not going to be as much as last year, but we should still see a decent amount of issuance this year."

Hurley said agency spreads look to remain historically tight going forward.

"I really don't see anything that's going to change that for agencies," she said. "I think the only thing that could probably move it substantially outward is if there are negative trends on the Fannie Mae and Freddie Mac front from Congress, but knowing how long Congress takes to really accomplish anything, I'm not expecting anything."

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