Agencies cling to tights as yields rise, primary flow enters hiatus; payrolls, Treasury supply eyed

By Kenneth Lim

Boston, March 25 - Agency spreads held on to recent tights on Friday on higher Treasury yields and the prospect of a supply drought over the next few weeks.

Bullet spreads closed unchanged versus Treasuries, an agency trader said.

"Agencies didn't move very much today," the trader said.

Market activity was a little quiet ahead of the weekend, one source said.

"Most people did their stuff yesterday," the source said. "Today's a little quieter because the market got richer overnight, and if you didn't get a chance to buy yesterday, you're probably a little reluctant to buy at today's spreads."

Callable volumes were robust, the source said.

"Issuance has been pretty good, especially with the back-up this week," the source said. "We were fortunate that the back-up coincided with a wave of redemptions, or actually came just after the redemptions, so there was plenty of demand."

Spreads show resilience

Treasury yields rose on Friday after Federal Reserve Bank of Philadelphia president Charles Plosser, who is a voting member of the policy-setting Federal Open Market Committee, said that the central bank would have to raise rates and pare its balance sheet "in the not-too-distant future."

The comments by Plosser, who is known as an inflation hawk, caused a sell-off in Treasuries and may have helped agency spreads at the front end of the yield curve, the trader said.

But longer maturities were mostly benefiting from Fannie Mae's decision on Thursday not to issue new Benchmark Notes. The government-sponsored enterprises have not issued new benchmark-sized bullet offerings since March 2, when Fannie Mae sold $4 billion of five-year notes.

"The next date of announcement is Freddie Mac on April 5, and there's a good chance they may not issue, and if that happens the next one is on April 13 [with Federal Home Loan Banks], and we won't have any supply for three or four weeks," the trader said.

Fannie Mae's announcement on Thursday set off strong buying in agencies, and investors were heartened on Friday that the market did not give up much of that tightening.

"We had a tremendous day yesterday," the trader said. "We tightened 2 to 3 basis points across the board, and even in late trading there was a grab fest. After having a day like that, you usually see some retracement, but we were unchanged today, so it was a positive day for agencies."

Quarter-end, payrolls ahead

The coming week could see a bit of volatility on end-of-quarter window dressing trades, the source said.

Investors will also be keeping an eye on the Treasury Department's $99 billion of auctions in the two-, five- and seven-year sectors through Wednesday.

But the biggest piece of news will probably be on Friday, when the employment situation report will update unemployment and non-farm payrolls figures.

"Uncertainty about non-farm payrolls could limit activity during the week," the source said. "We'll probably see a bit of setting up on Wednesday and maybe early Thursday, and then possibly Friday after the numbers come out. But I think all the unanswered questions are not going to be positive for volumes."

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