Agencies flat on uneventful Thursday; Portugal downgrade could support Treasury auctions

By Kenneth Lim

Boston, Dec. 23 - Agency spreads closed flat on Thursday with little movement in the markets ahead of an early close.

Bullets ended unchanged versus Treasuries with hardly anything trading.

"There's absolutely nothing going on," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial, just after lunchtime. "Most people in New York are already gone, and our shop is emptying out as we speak."

Another trader said callables were also quiet Thursday.

"There's nobody to do business with," the trader said. "I wish I could tell you more, but it's just that quiet. I saw a couple of trades, but not enough to say the market's one way or the other."

Portugal downgrade ignored

Investors were unfazed after Fitch Ratings downgraded Portugal's credit rating by one notch to A+ from AA-, the trader added.

The news came just after rival credit rating agency Moody's Investors Services warned that it might downgrade Portugal's A1 rating.

The market did not flinch.

"Not a huge surprise for the market," the trader said. "I guess there was a little bit of pressure from spreads. But looking at the screens, I don't think it really mattered. The biggest reason is people were already negative on the credit, so the downgrade's already in the prices."

The bigger implication of the downgrade may come after the market reopens Monday, when the Treasury is expected to begin $99 billion of auctions in the two-, five- and seven-year sectors over the coming week.

"If there's more news on this front over the weekend, it could be helpful for next week's auctions," the trader said. "As it stands, the downgrade is probably supportive of the auctions."

Agency spreads will probably not deviate too much from where they are right now in the final week of the year, the trader added.

"It's probably going to be a throwaway week next week," the trader said. "But I think things will pick up once we get through the holidays."

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