Agencies flat to slightly wider as investors await jobs data; callable issuance picks up

By Kenneth Lim

Boston, Sept. 2 - Agency spreads widened a touch on Thursday as investors mostly stayed on the sidelines ahead of Friday's labor report.

Bullets closed flat to 0.5 basis point wider from Treasuries on Thursday on light volumes.

"We were a little bit wider, but very, very quiet trading," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

Callable issuance improved slightly from the lackluster first half of the week.

"There was a fair amount of issuance in callables today," Hurley said. "Still the majority of issuance seems to be in step-ups overwhelmingly, just because of the shape of the yield curve and the defensive nature of step-ups."

With the steeper yield curve, longer-dated callable step-up products can offer much more attractive coupons for investors, especially in light of the current low interest rates.

"You definitely are getting a higher pick-up if you have a steep yield curve," Hurley said. "You can issue step-ups with higher coupons on the longer end of the yield curve, and in this low-rates environment, that makes it very desirable."

All eyes on payrolls

Market activity on Thursday was muted mostly in anticipation of Friday's labor report, which will give the latest snapshot of unemployment and non-farm payroll data.

"People were squaring positions and waiting for tomorrow's unemployment report," Hurley said.

The lack of supply this week and the pending economic data combined to keep trading to a minimum on Thursday.

"It's just been dead the past couple of hours," Hurley said.

The market appeared to hold a neutral position amid a lack of certainty about how the data will look.

"I think most people were fairly flat just because it's a very important number," Hurley said.

Short burst expected

Friday's market is officially open for regular hours, but activity is expected to fade quickly after the labor report is released. Hurley said.

"We're also going into a three-day weekend, so there's a possibility of less participation than usual tomorrow," she said.

But the few hours that the agency market will be active could see volatility depending on the numbers. Investors are widely expecting a weak set of data, Hurley said.

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