Agencies widen with swaps on strong jobs report; Freddie Mac sells $6 billion of notes

By Kenneth Lim

Boston, Jan. 5 - Agency spreads widened slightly on Wednesday in line with swaps as investors sold following a stronger-than-expected jobs report.

On the primary front, Freddie Mac sold $6 billion of three-year Reference Notes in a well-received offering.

Bullet spreads closed about 1 to 2 basis points wider versus Treasuries on Wednesday but were flat versus swaps.

"Agency spreads are mixed, with the front end a little bit softer, mostly in line with swaps," an agency trader said. "Swap spreads are basically almost 2 bps wider across the curve, and agencies are probably a little better, with the exception of the real short end."

Secondary callables struggled as rates backed up.

"Callables performed very well the last couple of sessions, until today when you get this kind of rate blow-up," the trader said. "Coupons were dropping, and then we had this sudden push wider back toward the high yields, which has widened spreads a little bit in callable land due to the uptick in volatility. I imagine that will continue to Friday when we get payrolls."

Despite Wednesday's widening, the overall agency market had a positive tone to it in light of its relative resilience amid the broader fixed income sell-off.

"There's definitely money being put to work by the investment community," the trader said. "I have seen buyers in the secondary market in both callables and bullets, so there's definitely a good deal of demand out there that's holding spreads in."

Freddie Mac sells three-years

Freddie Mac sold $6 billion of three-year Reference Notes to open the primary market for benchmark-sized bullets.

The deal sold at par to yield 1.375%, representing a spread of 27 bps over Treasuries.

Price talk was at 27 bps over Treasuries.

Barclays Capital, Citigroup Global Markets and J.P. Morgan Chase were the lead managers.

The new notes initially tightened slightly, trading as tight as 26 bps over Treasuries, but succumbed to the market's widening in the afternoon to close at an offered spread of 27 bps. Swap spreads were 27.5 bps at pricing, widening to 29 bps at the close, so the deal outperformed swaps.

"It traded a little better at the break, but of course with swaps moving out throughout the day and the sell-off, we ended up offered at plus 27, which is where the deal came," the trader said.

The deal received strong demand, with the order book close to $8 billion at the end of marketing, the trader added. Investors had been setting up for the deal on Tuesday, with price talk representing a concession of about 1.5 bps to surrounding issues.

"While the rest of the agency sectors saw better buying in the first two days of the year as accounts came back to the marketplace, that sector was more or less unchanged to maybe 0.5 bp tighter," the trader said.

Jobs data surprises

The market got a nasty jolt on Wednesday when ADP Employer Services said U.S. private employers created 297,000 jobs in December, far more than the market was expecting.

The data raised expectations that Friday's non-farm payrolls report would also be strong, putting pressure on Treasuries and other fixed-income markets.

"We immediately saw some accounts move to the sidelines, concerned about what Friday's payroll situation may show," the trader said.

Not all was negative for agencies, however, with the rise in yields attracting some buyers late in the day, the trader added.

"Some accounts on the sidelines saw the backup as an opportunity to come back in, although some saw the volatility in the last few weeks and chose to keep their powder dry until Friday," the trader said.

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