Agencies mark time as Treasury auction, Greece keep money on sidelines; new supply ahead

By Kenneth Lim

Boston, June 27 - Agency spreads closed flat on Monday on thin trading amid Treasury auctions and a persistently foggy outlook surrounding Greece's debt crisis.

Bullet spreads closed unchanged versus Treasuries on the day with little movement in the market.

"Agencies are basically unchanged on the day," said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial, noting "very little activity. We saw two to three trades this morning, and that's been it."

Even callables had a quiet session after seeing a pick-up in interest during the previous week.

"That's kind of slowed down as well," Riley said.

Most of the buying in callables has been focused on short-term deals with calls after just one year. The belly of the curve has been quiet.

"I saw a five-year that came on Friday that's still available," Riley said. "Another five-year came today, still available. The interest lies in the very, very short part of the curve, which suggests that people are just parking funds for the eventual back-up in yields."

A number of the deals on Monday also seemed to be smaller, targeted issues that mainly served to please some clients and shore up league tables. One deal, for example, priced at 99.999%, meaning that the underwriters only took a hair's width of profit on the deal, Riley said.

"They're doing them just to appease customers, like large money market type players," he said. "You can't get your hands on them because they're taken off once they're sold."

Mixed auction

The market's attention was mostly focused on the Treasury's $35 billion auction of two-year notes, which drew a mixed response from investors.

The notes sold at a stop yield of 0.395% with a bid-to-cover ratio of 3.46 times. Direct and indirect demand accounted for 35.5% of the bids, which suggested a higher-than-usual reliance on dealers.

The auction "was very weak overall with virtually no category demonstrating significant strength," wrote analysts from Nomura Securities International in a note. "If there was a saving grace for this auction, the stopout yield was the lowest in history."

Yields in general rose in response to the auction. Investors were also wary about the next two auctions, with $35 billion of five-year notes and $29 billion of seven-year notes to be offered through Wednesday.

The focus on the auction, as well as ongoing uncertainty about the debt crisis in Greece, kept investors mostly on the sidelines.

"Today was just dead, lethargic markets," Riley said. "It's getting to be a three-day work week with nothing happening on Mondays and Fridays. Sometimes you begin to wonder if there's any point in coming in on Mondays and Fridays."

More supply ahead

The week ahead could see potential agency supply coming from Freddie Mac, which has a calendar announcement on Reference Notes issuance slated for Wednesday.

Traders are also expecting a little bit of window-dressing trading as the end of the quarter approaches.

The economic calendar will see housing data coming with the S&P/Case-Shiller home price index and pending home sales due Tuesday and Wednesday. The ISM manufacturing survey will be reported on Friday, along with the Consumer Sentiment Index.

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