Agency spreads widen as key economic data approach; good to buy on back-ups, trader says

By Kenneth Lim

Boston, May 3 - Agency spreads eased wider on Monday as investors took a cautious stance ahead of a busy week in economic data.

Bullet spreads expanded by about 1 to 2 basis points in a slow start to the week.

"I think it's just the market concentrating about how the economic statistics are going to come in the week, culminating with the unemployment, non-farm payroll numbers," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. "We do have a lot of statistics this week."

The callable market had an active session as rates improved, one agency trader said.

There was "good volume in callables," the trader said, noting it's the "same old story."

There's "strong interest in front-end callables, step-ups; when rates go up, investors will pick up their buying for that extra yield," the trader said.

Volumes were muted coming out of the weekend.

"I would say it's average for a Monday, but compared to the other days of the week it's a pretty quiet day," the trader said.

Freddie Mac on the horizon

Freddie Mac could choose to issue new Reference Notes at the front end of the yield curve when a calendar slot opens up on Wednesday, the trader said.

"I think they'll do three- or five-years, although it's been a long time since anybody did a five-year," the trader said.

Libor funding levels have been more attractive for issuers in the two- and three-year sectors, and that has not changed much, the trader said, although market demand is growing for new paper in the five-year space, the trader added.

"It's an inexact science," the trader said. "There's definitely demand for five-years, but what the market wants is only part of the equation for the GSEs. I think there's a number of people who would like to see some new 10- and 30-years, but nobody thinks that's going to happen soon."

Market watches data

Investors are slightly cautious about the economic data coming out in the week ahead, with unemployment and non-farm payrolls as the main events on Friday, Hurley said.

"I think there's a little bit of nervousness, but not extensively so," she said.

The market is concerned that payroll figures will be rosier than expected, which could cause a drop in debt prices.

"Fears are that they'll be printing stronger than expected," she said.

But Hurley did not expect the official Federal Reserve interest rate policy to change anytime soon even if the numbers look good.

"I don't think that the Fed is going change anything...into next year, at the earliest," she said. "They'd want to see job growth being sustained first."

The data coming out could cause some volatility in the markets as investors reconcile reality and expectations.

"I think investors should buy the back-up," Hurley said. "I do think we're in a trading range. I think investors should buy any back-up in yields."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.