Agencies spreads flat as yields rise following labor report; Fannie Mae, Freddie Mac eyed

By Kenneth Lim

Boston, Feb. 4 - Agency spreads closed unchanged on Friday as yields climbed in sympathy with Treasuries after a positive labor report fueled greater optimism for the economy.

Two- to three-year bullet spreads came in by about half a basis point, while five-years narrowed by about 1 bp. The rest of the yield curve was mostly flat on the day, an agency trader said.

Trading volumes were muted, with investors too caught up in managing the sharp drop in Treasury prices.

"It's been very quiet, actually," the trader said. "When there's a large delta move like we had today, there's usually not a lot of activity in agencies."

Some bustle was seen in the 10-year sector, where Tennessee Valley Authority sold $1.5 billion of 3.875% 10-year Global Power Bonds late Thursday.

The notes, which priced at a spread of 42 bps over Treasuries, closed Friday at about 40 bps over Treasuries.

"The market's been crying out for 10-year paper, and the big guys were able to get that deal done," the trader said. "It definitely went very well."

Callable issuance was a little more lively, with some dealers trying to take advantage of the higher coupons.

"I did see a lot of callable structures printed, though mostly inside of 2.5 years," the trader said. "We haven't been around these yields in about six weeks, so people who missed those yields had another opportunity to get in."

Yields soar on jobs report

Yields followed Treasuries sharply higher on Friday in reaction to a week of strong economic data and a positive labor report.

The Labor Department said Friday that the unemployment rate fell to 9% in January from 9.4% in December. Non-farm payrolls increased by a smaller-than-expected 36,000, but the Street partly explained the shortfall as a result of unseasonably high snowfall over the past month.

The sharp increase in yields kept many wary investors on the sidelines on Friday, but buyers could be hovering in the wings looking to pounce on the backup, the trader said.

"We do have a lot more [callable] issues below par, and that would bring some guys in on a forward basis," the trader said.

Wall Street Access trader Michael Skinner was not as optimistic, noting that the market fell through key technical support levels.

"There are potential buyers, but we're going to close here through some major support levels in the seven, 10 and 30 years," he said. "I think it's more two-way than a straight flush."

He conceded that there would probably be some bottom feeders looking for bargains, but he felt that the market was still on shaky ground.

"That's not a good tone going into next week," he said.

GSE discussion ahead

Looming discussions in Washington about the future of Fannie Mae and Freddie Mac could hamper a rebound by the market after the weekend.

A subcommittee hearing in the House of Representatives has been scheduled on Feb. 9 to discuss the issue. Meanwhile, the Street expects the Treasury to announce a plan for the government-sponsored enterprises in the coming week.

"Rumors flying around now are that Treasury is going to release preliminary plans for the re-jigging of the agencies going forward, and that it will be released next week," the trader said. "The House meeting is on the 9th, so my feeling is they'll release just ahead of that."

The potential for headline risk could continue to keep money on the sidelines, the trader added.

"The uncertainty around this proposal next week, that's not helping the market," the trader said. "Guys are like, oh, maybe I'll just hold off a little bit more."

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