Agencies inch wider as Treasuries gain on weak sentiment, uncertainty over debt ceiling

By Kenneth Lim

Boston, July 15 - Agency spreads eased out slightly on a quiet Friday amid weak consumer data and uncertainty about how Washington's standoff over the debt ceiling will end up.

Bullet spreads closed a touch wider versus Treasuries on the day.

"We were about unchanged to a smidgeon wider," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

While bullet trading was muted, callable activity was slightly more robust.

"There was a lot of activity in callables just because yields remain so tremendously low that there's a lot of demand for callables compared to bullets," Hurley said.

Longer call protection structures and step-ups are the most popular products among callable issues, Hurley added. For step-ups, coupons that are front loaded to be higher at the start are more in demand.

"Just because on step-ups, for the most part those coupons that have ultra high steps at the end, there's virtually almost no chance that it's going to get there," she said.

Economic data disappoints

The session began on a weak note as the consumer price index slipped month on month by 0.2% as energy prices came down. But core CPI, which excludes food and gas, rose in June, lowering the probability that the Federal Reserve will pursue a third round of quantitative easing.

The Reuters/University of Michigan consumer sentiment index added some fuel to the day's risk-off trades, showing a sharp drop in the outlook for consumer spending. The index dropped to 63.8 from 71.5, well below the Street's expectation of 71.

But trading during the day was choppy as investors confronted a mix of positive and negative news. Offsetting the poor economic data, the results of Europe's bank stress tests showed that most banks on the continent passed.

The day's activity mostly took place in the morning.

"It was actually pretty quiet," Hurley said. "After a flurry in the morning, it got really quiet."

Topmost on investors' minds was the U.S. debt ceiling and lawmakers' continued inability to reach a deal to raise the amount that the country can borrow before an Aug. 2 deadline, beyond which default is possible.

Standard & Poor's on Friday said it will downgrade the agencies as well if it cuts the U.S. government debt rating, although the news did not come as a surprise to the Street.

In fact, investors seemed to be confident that Washington will avert default.

"I really don't think there's a concern that the Treasury is not going to pay its debt, but it is a big uncertainty hanging over the market," Hurley said.

Debt ceiling, supply ahead

Investors will continue to monitor the debt ceiling negotiations closely, and the issue will likely dominate the markets after the weekend, Hurley said.

"People are waiting and watching carefully to see what happens, although I really don't expect anything over the weekend," she said.

The agency market could also see some benchmark-sized supply on July 19 with Federal Home Loan Banks slated to make an announcement on Global Notes.

© 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.