Agencies widen as hiring standstill sends Treasuries higher; market bets on Fed action

By Kenneth Lim

Boston, Sept. 2 - Agency spreads widened Friday as investors poured into Treasuries after a sharply disappointing employment report heightened fears of another recession.

Bullet spreads widened by about 1 basis point to 2 bps across the yield curve, although trading volumes were extremely light.

"There's not a lot trading outside of Treasury markets, honestly," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

There was some buying out on the yield curve because of some month-end extension trades.

"There's been some buying, a bit of knock-on effect on month-end index buying, and the extension's pretty good," one trader said. "Today we saw more clean-up trading. But we're not seeing more direction trading yet."

Weak payrolls spark flight

The Labor Department reported that non-farm payrolls did not change in August, far short of the Street's expectation of a 60,000 increase. The unemployment rate stayed flat at 9.1%.

"It was a pretty miserable August payrolls result," LeBas said. "There's not much positive out of that."

The dismal report, which suggested that no net new jobs were created in August, raised investors' fears that the U.S. economy could be headed for another recession and strengthened the view that the new data will be enough to nudge the Federal Reserve into a new round of accommodative policy.

The widely held view on the Street is that the Fed will not pursue a third outright asset purchase program. Instead, the Fed could adjust its existing portfolio to hold more long-dated securities in order to help flatten the yield curve.

"There's greater talk that the Fed will take some sort of accommodative action...that's the reason why the curve is flattening pretty aggressively right now," LeBas said.

Treasury yields at the long end of the curve fell dramatically on Friday as investors sought out safe haven assets and tried to get ahead of the possible Fed buying in long maturities. The benchmark 10-year Treasury yield fell below 2% to settle at 1.99% at the close.

Agencies failed to keep up with the soaring Treasuries, which also drew most of the market's attention for the day.

"There was really very little trading in agencies today," the trader said.

Tightening possible

Investors will have three days to mull the implications of the employment situation report, with markets closed on Monday for Labor Day.

When the market reopens, it will be looking for a new trading range in the run up to and following the Federal Open Market Committee's next meeting on Sept. 20 to Sept. 21.

"We think when the market settles into a new range from the affirmation from the Fed, that should tighten spreads back up," the trader said.

The trader explained that low yield levels and a dearth of supply should continue to support tight agency spreads, implying that Friday's widening could have been a knee-jerk move.

"I'm a little more uncomfortable being short agencies than I'm uncomfortable having a position," the trader said.

© 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.