Agencies flat after volatile session as strong payrolls data, Greece rumors split market

By Kenneth Lim

Boston, May 6 - Agency spreads closed flat on Friday as a late rumor about Greece leaving the euro zone offset earlier tightening sparked by a stronger-than-expected employment report.

Bullet spreads ended the day unchanged versus Treasuries but outperformed swaps.

"I think swaps widened out a little bit in response to the Greek debt concerns," an agency trader said.

Trading volumes were muted amid the day's volatility.

"Really not much of anything today," the trader said. "It's kind of an uneventful day for agencies. We began a little busy as the employment numbers came in better than expected, but once the market began to rally later in the day people became disinterested."

Payrolls beat estimates

Yields fell early Friday after the Labor Department reported that non-farm payrolls rose by 244,000 in April, significantly more than the 185,000 Street estimate.

But the unemployment rate rose to 9% from 8.8%.

The strong payrolls data threw a curveball at investors, who were trying to reconcile the positive increase in jobs with the higher unemployment rate as well as a sharp increase in new jobless claims data released Thursday, the trader said.

"With the expectation as such around the employment report, there was a lot of uncertainty when the numbers came in so large," the trader said. "Yesterday when claims came out so high, it was written off a little bit...but conversely today's numbers didn't account for those factors. So there's a little hesitation to put both feet in the ring."

Although there was some modest buy interest on the back of the payrolls data, market action was muted because of that uncertainty, the trader said.

"With the recent rally in rates, investors were looking for a better entry point, and they were hoping that the numbers this morning would give them the opportunity, but it really didn't move back that much," the trader said. "Maybe 2 basis points in the two-year sector and maybe 5 to 6 bps in the five to 10s."

Greece rumors counter data

The markets reversed course in the afternoon on reports that Greece, which is battling a mounting debt crisis, may seek to leave the euro zone.

Greece's deputy Finance Minister Filippos Sachinidis denied the reports.

"We started to tick higher, and people started to scratch their heads, then this rumor about Greece started to percolate," the trader said. "It hit the forex markets and rallied the dollar and that money found its way into Treasuries."

The reversal sent yields falling again, and discouraged would-be agency buyers from making moves.

"How all that translates to agencies is rates buyers looking to buy didn't find their entry point," the trader said.

The market seems confused entering the weekend, the trader said.

"You've got supply next week in terms of the refunding," the trader said. "People are starting to sense that the recovery may be stalling a little bit, hence the rallying Treasuries, but at the same time, the question is whether inflation is going to emerge or not."

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