Agencies widen as disappointing jobs data fuels Treasury rally; Freddie sees strong demand

By Kenneth Lim

Boston, June 1 - Agency spreads widened slightly on Wednesday as supply came at the front end and Treasuries rallied on another round of weak economic data.

Bullet spreads slipped slightly further away from Treasuries in the short and long ends of the yield curve, while staying flat in the belly of the curve. But getting a good read on the market was complicated by the fact that trading volumes were extremely light.

"The spread markets were pretty quiet," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. "Everybody was convinced that agencies were staying on top of spreads, but the reality is that there was not that much trading activity to really say it was one way or the other."

The callable market was also quiet amid falling coupon levels, another trader said.

"Issuers want to issue new callables, but investors don't really want to buy at these levels," the trader said. "On the other hand, there's some nervousness among investors that rates could fall even more and they could be forced to buy at even lower yields later on."

Freddie Mac sees solid demand

Freddie Mac priced $4 billion of three-year 1% Reference Notes on Wednesday at a spread of 27 basis points over Treasuries.

The notes were sold at 99.928 to yield 1.023%. Price talk was at a spread of 27 bps over Treasuries.

Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and UBS Securities LLC were the lead managers.

The notes closed the day at a spread of about 26.5 bps over Treasuries, tightening by 0.5 bp.

"It was a pretty good deal," the trader said. "It was pretty fairly priced, and obviously there's a lot of demand these days for relatively safe assets at the short end of the curve."

Investors have also been hungry for supply because of a lack of funding needs at the agency issuers, so the market had no trouble taking down the additional debt, the trader added.

But Freddie Mac also got a good deal because it got to raise $4 billion of debt at a relatively low cost.

"They raised $4 billion for just over 1%, which is a very good rate for a borrower," the trader said. "I think it was hard for them to stay away at these rates."

LeBas agreed.

"You can't complain about three-year notes at 1.05% cost, so I think they certainly picked an opportune time," he said.

Yields fall further

Yields continued to fall on Wednesday as the ADP Employer Services' private payrolls report showed a sharp drop in hiring in May.

"The market was certainly expecting some slightly disappointing results, but they weren't expecting the bad results implied by Wednesday morning's ADP number," LeBas said.

ADP said private payrolls increased by 38,000 in May, far below the Street estimate of 175,000. That surprisingly sharp drop led to a wave of downward revisions of forecasts for Friday's key employment situation report.

The agency trader said the agency market was relegated to the sidelines as investors focused on the Treasury market.

"When there's such a sharp move in Treasuries, investors are not focusing on spread products," the trader said. "The market's going to be quiet up until after Friday's non-farm payrolls and unemployment report comes out."

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