Agencies flat as Treasuries rally on jump in weekly jobless claims; trading volumes weak

By Kenneth Lim

Boston, May 5 - Agency spreads stayed mostly flat on Thursday as an increase in weekly jobless claims fed pessimism about April's payrolls and unemployment numbers scheduled to be released on Friday.

Bullet spreads were unmoved on the day on light trading, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

"It was a real quiet day for all spread markets, including agencies, ahead of tomorrow's employment report," he said. "Spreads were mostly unchanged.

Trading volumes remained extremely thin as investors preferred to hug the sidelines ahead of Friday's employment situation report, one agency trader said.

"I wish I had more to tell you, but it's like a ghost town here," the trader said.

Falling yields, moving in sympathy with rallying Treasuries, are also discouraging value-seeking investors.

"The fact that yields are low isn't helping," the trader said. "A lot of people would rather wait out Friday and hope for a back-up in rates before they come back in."

Treasuries rally

Treasury yields fell again on Thursday on the back of a jump in jobless claims, as the market reflected concerns about the economic recovery and shed risk.

New claims rose to 474,000 in the previous week, an eight-month high. The Street had been expecting claims to fall.

LeBas said some of the jump could be attributed to seasonal factors, such as Spring Break layoffs of teachers and new rules in Oregon. Adjustments for new and closed companies also tend to be higher in April.

"It also means the rates market is going to be very sensitive to one-time factors, and that's going to mean a lot of volatility," he said.

LeBas maintained his estimate for a 189,000 increase in non-farm payrolls, explaining that he believed he had taken into account the seasonal factors.

Nevertheless, "April is a notoriously tough month to forecast," he said.

The trader agreed that the next few trading sessions could be more volatile than usual, and that could continue to mute trading volumes.

"It's hard to trade spreads when rates are too volatile," the trader said.

Markets seek premiums

The callable market on Thursday had a decent session for issuance, LeBas said.

"There was a fair amount of issuance, primarily in smaller deals," he said. "And there's a distinct demand for premium callables."

Premium callables refers to issues that are sold at a premium.

"The reason is in the event that interest rates rise, their yield to maturity is much greater than their yield to call, so if rates rise and the notes aren't called, their yields look very attractive," LeBas said.

The market's current preference for premium callables tracks back to the last few weeks, as interest rates have fallen, LeBas said.

"There has definitely been a greater focus on premium callables in the last month or so, which is perhaps a feature of the more broad-based decline in interest rates," he said.

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