Agency spreads narrow on flight to safety after poor jobs data; Fannie Mae offering eyed

By Kenneth Lim

Boston, Jan. 8 - Agency spreads tightened slightly on Friday as investors sought safety following disappointing unemployment data.

Bullet spreads were about 1 basis point narrower against Treasuries, said D.A. Davidson's vice president of fixed-income trading, Mary Ann Hurley.

Most of the trading happened in the morning after the December non-farm payrolls numbers were released, but volumes began to fade once investors had made their moves, she added.

"It was kind of quiet after the post-unemployment trade," Hurley said. "After the post-unemployment trade it was busy for about an hour; then, it has just gotten progressively more quiet."

The week ahead could bring a calendar offering from Fannie Mae, which has scheduled a Benchmark Notes announcement for the coming Wednesday.

"It's probably going to be a three-year issue, and I'm hearing the size is going to be about $4 billion with price talk in the mid-20s," Hurley said. "They have generally been issuing around the five-year area, so three-years just seems consistent."

Poor unemployment data

Friday's rally came on the back of poor non-farm payrolls numbers for December.

U.S. non-farm payrolls fell by 85,000 in December after jobs were added in November, according to estimates by the Labor Department on Friday. Unemployment remained flat at 10%, while a large number of people, 661,000, gave up looking for work.

"It was a horrible report," Hurley said. "The only reason why the unemployment rate did decline was because there was such a big drop in the labor force."

The news led to a rally in Treasury prices, and the richness in that market pushed some investors toward agencies, Hurley explained.

"People were buying agencies just because there's a larger yield pickup," she said.

Positive start

The first week of the year ended on a positive note for the market, mostly driven by an active primary pipeline, Hurley said.

"It's been fairly busy," she said, "mostly because we had the Freddie Mac five-years, and we've been having quite a bit of TAP issues, and [Federal Farm Credit Banks] has come to market with both bullets and callables."

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