Agencies stick with Treasuries as yields fall on weak jobs data; market looks to supply ahead

By Kenneth Lim

Boston, June 3 - Agency spreads kept up with rallying Treasuries on a quiet Friday following a disappointing employment situation report.

Bullet spreads closed the day unchanged, with most of the trading done at the start of the day.

"We had a lot of activity in about the first hour and since then it has been very quiet," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co. "Spreads on agencies have been pretty much unchanged."

The callable market also had a lackluster session, with volumes noticeably lighter than earlier in the week. Part of the slowdown was due to good sales of older issues in the past few days.

"Yesterday a lot of people had upsized previous deals, so there just really wasn't a need to issue new paper," Hurley said.

Labor report disappoints

Yields fell on Friday after the Labor Department reported that U.S. employers added just 54,000 jobs in May, well short of the Street estimate for a 150,000 increase.

The unemployment rate rose to 9.1% from 9%.

"Today's job data turned out to be even worse than feared," Fannie Mae chief economist Doug Duncan said in a statement. "This report confirms other recent data from the housing and manufacturing sectors that the recovery is stalling. As a result, there is less fundamental support to drive a healthy rebound for housing. The risks are increasing that home prices will decline further, eroding consumer confidence and household wealth."

The data pushed 10-year Treasury yields back below 3%, but agencies managed to show some resilience, keeping up with the falling yields.

"They pretty much tracked Treasuries," Hurley said. "Spreads were really pretty much unchanged, so yields are a little bit lower on agencies today."

Supply ahead

The coming week will be active on the supply front, with Federal Home Loan Banks slated to make an announcement on Global Notes on Wednesday.

The Treasury will also auction $66 billion of three-, 10- and 30-year securities Tuesday through Thursday.

Hurley did not expect supply from FHLB to put much pressure on spreads.

"We have supply next week, but at this point supply is really almost a constant," she said. "Maybe not coupon supply, but to say that supply is going to make yields go back up is really just a misnomer now."

Investors who had been hoping for a back-up in yields before coming back into the market may now find it even more difficult to find bargains.

"I think a lot of people definitely missed the rally, but yet 10s are hanging just below 3% right now, so I think there's a lot of money waiting to be invested, but by the same token we're not going to see a big dip to generate some buying opportunities," Hurley said.

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