Agencies unchanged as jobs data meets consensus; market has supply in sights for week ahead

By Kenneth Lim

Boston, Sept. 4 - The agency market looked to the week ahead on Friday, leaving spreads mostly unchanged on low volumes as new employment data met expectations.

Agency spreads ended generally flat on Friday, an agency trader said.

"I haven't really seen much of a change in levels," the trader said.

Volumes were extremely light, and traders were going home even before the mid-day unofficial close. The Securities Industry and Financial Market Association recommended a full session Friday, dropping its long-standing policy of advising a half session ahead of the Labor Day holiday, but many in the bond markets wrapped things up early anyway.

"People keep asking us why we're still sticking around," the trader said.

Most of the market's trading had been done earlier in the week, the trader added.

"For the most part we had some better action earlier in the week as they started to talk about Fannie Mae and Freddie Mac and then you had Federal Reserve talking about curtailing the buying of agency securities. But the biggest thing was the announcement by the Fed to include on-the-run buybacks. We were better on longer dated on-the-runs midweek, but some of that was given back during the course of the week."

Payrolls meet expectations

Non-farm payrolls fell by 216,000 jobs in August while the unemployment rate rose to 9.7%, according to data by the U.S. Labor Department on Friday.

Analysts had been expecting a drop of about 225,000 with an unemployment rate of 9.5%.

The data "came close to consensus," which may have explained the market's muted response, the agency trader said.

"I think it's still a non-event until we get to 10% [unemployment], which is what everyone's calling for, and then you see where do we go from there," the trader said.

But the market could show some cautiousness ahead.

"If you take a step back, it's still a lot of jobs being lost," the trader said.

All about supply

All eyes will be on the supply situation when the markets reopen after the long weekend.

"There's a lot of supply coming in Treasuries," the trader said. "I'm hoping we'll get some concessions there in yields, which could bring in some value for us as well."

Federal Home Loan Banks is also on the calendar with an announcement on Global Notes issuance slated for Wednesday. If the agency decides to issue new paper, it could be something in the two-year sector, the trader said.

"We have some supply of our own coming next week in the form of Home Loans, announcing on Wednesday," the trader said. "But it's getting more and more difficult to project as to what they're going to do."

After weeks of thin volumes as the summer approached its end, a pick-up in activity would also be welcome, the trader said.

"The first thing I would hope to see is a little more liquidity," the trader said. "There's been a lot of people out, on the Street side and on the account side. I would hope liquidity would improve a little bit."

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