Agencies mixed; investors eye payrolls, holiday weekend; market tight as Treasuries rally

By Kenneth Lim

Boston, July 1 - Agency spreads ended mixed to slightly tighter on Thursday, keeping pace with Treasuries amid expectations of poor payrolls data.

Bullet spreads tightened a touch on Thursday, with most sectors ending about half a basis point narrower versus Treasuries. Five-year spreads saw some slight weakness, easing out by 0.5 to 1 bp.

"It wasn't a big move, but with swaps pushing wider, agencies didn't move much," said Mike Goldman, head of agency trading at Guggenheim Partners. "They've really tightened the last few days."

Callable issuance saw decent volumes although the richness of structured paper has tempered some of the demand.

"There's nothing to scream about, but a number of deals were coming," Goldman said. "A lot of these deals are now above par with the rally that we've had."

Secondary trading activity was "average," Goldman said, although volumes have not been stellar. But that also made it difficult to get a good sense of the market.

"Anytime you get into illiquid markets, it's easy to move things around a little bit," he said. "If dealers are long paper...what they do is mark stuff tighter."

A slight pullback from current levels is possible, Goldman added.

"It hasn't seemed to be the wise trade, but the risk-reward would suggest it's likely," he said.

New quarter on hold

The market appeared to be taking a breather after the busy buying in the past two days to meet month-end requirements, another trader said.

Thursday's market was mostly just treading water and waiting for Friday and the next week, the trader said. The U.S. Labor Department will report non-farm payroll data on Friday ahead of the long weekend. Monday is a holiday for Independence Day.

"It's like one of those old Westerns where everyone's got their hands next to their guns, but no sudden movements," the trader said. "Nobody's pulling any trigger until they see payrolls tomorrow. Everyone's expecting the numbers to be bad."

But even reaction to payrolls on Friday could be muted because of the holiday, the trader said.

"It might move a little, but the real market's only going to start after next Tuesday," the trader said.

Spillover benefits

In the meantime, agencies continue to enjoy being the higher-yield close cousin of Treasuries, the trader said.

"There's a bit of bidding due to the rally in Treasuries," the trader said. "I think many of the domestic accounts are looking at Treasuries and thinking, those yields don't look that good anymore. On the other hand, agencies three years and in offer a little bit more yield but for most purposes they're just as safe as Treasuries. People who can are more likely to buy front-end agencies over Treasuries."

The longer-end of the agency yield curve has not benefited as much, but the investors are slowly but surely extending out to longer maturities as the front end offers less value, the trader said.

"We're seeing some interest in sevens now," the trader said.

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