Agencies widen as market hunkers down for labor data; callables exploit rate back-up

By Kenneth Lim

Boston, March 3 - Agency spreads closed a touch wider Thursday as rates fell and investors squared their positions on expectations of a stronger labor situation report before the weekend.

Bullet spreads closed flat to slightly wider versus Treasuries, said D.A. Davidson vice president of fixed income trading Mary Ann Hurley.

"It's been pretty quiet," she said. "I'd say overall we're pretty much unchanged to 1 basis point wider on the longer end."

Trading volumes were down on the volatility, and in anticipation of Friday's labor situation report.

"A lot of people are just on the sidelines waiting for the day to pass," Hurley said.

Jobless claims fall

Rates rose sharply on Thursday after unemployment claims fell last week to 368,000, a low not seen in more than two years.

The lower claims numbers and Wednesday's increase in the American National Employment Report of private jobs added to expectations that Friday's non-farm payrolls and unemployment figures would paint a stronger picture of the labor market.

"A lot of people at this point and even earlier in the morning have just been getting squared ahead of the numbers tomorrow," Hurley said. "Market participants are worried about economic growth picking up, inflation and higher interest rates."

Agency spreads may not have moved much, but in terms of absolute yields the market ended the session on a weaker note.

"They're not narrowing to Treasuries, and yields are increasing," Hurley said.

Callables pick up

The higher rates over the past two sessions finally drew enough demand back to the callable market for new issues to come back with a bang.

"There was a lot of callable issuance today and spreads have widened in the callable sector," Hurley said.

Investors were hoping to take advantage of the higher coupons that have resulted in the rates back-up, she added.

"You definitely get more yield when you pick up a callable, compared to a bullet, and of course step-ups are still being aggressively printed just because of their defensive nature."

The steep yield curve has also helped dealers to offer better headline terms to attract investors.

"If the yield curve is really steep, yields are a lot higher on the longer end, and you construct your steps so that it steps up at a very aggressive pace, with very high coupons on the longer end," Hurley said. "Chances are it's going to get called before it gets to those steps, but the steep yield curve allows it to be done, and you get a very attractive looking yield to maturity."

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