Agencies widen following drop in jobless claims; Bernanke strengthens low-rates outlook

By Kenneth Lim

Boston, Feb. 3 - Agency spreads widened slightly on Thursday as investors abandoned safe-haven markets amid better economic data.

Bullet spreads closed about 1 to 1.5 basis points wider versus Treasuries, mostly on the longer end of the yield curve, said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

"I think it just matches the general tone of the Treasury market," she said.

Callable issuance was active, with step-up structures dominating the pipeline of new deals.

"Most of the agencies are still issuing a fair amount of callables, mostly in the 10-year and under sector," Hurley said. "There are still a lot of step-ups. The yield curve is so steep that a lot of the step-ups have large coupons in the later part of the curve."

Bernanke strikes dovish tone

Although Federal Reserve chairman Ben Bernanke, in comments to the National Press Club Thursday, suggested that the central bank is still dovish on rates, investors are concerned about rising yields, and so they are trying to pick up as much yield as they can right now, Hurley added.

"People would rather pick up the yield," she said. "If prices are going to go down, the call will be inconsequential anyway."

Bernanke on Thursday said that the Fed's second round of quantitative easing appears to be working, and the country's economic recovery has strengthened. But the job market remains weaker than the Fed's target, and the central bank will likely maintain current policy until employment and inflation are nearer to desired levels.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability," he said.

Investors take on risk

Agency spreads took a hit on Thursday, taking their cue from Treasuries as stronger economic data emboldened investors to seek riskier but higher yielding assets, Hurley said.

"It's just people shifting their interests to higher risk assets than what the Treasury and agency markets offer," she said.

New jobless claims in the previous week fell 42,000, the Labor Department said Thursday. That, in addition to stronger-than-expected ADP private employment data on Wednesday, led to market concerns that Friday's unemployment figure and non-farm payroll data would surpass Street estimates.

"Unemployment and non-farm payrolls are always one of the key data in any month," Hurley said.

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