Agencies unchanged as Europe offers relief for Greece; reports say U.S. near deficit deal

By Kenneth Lim

Boston, July 21 - Agency spreads closed flat on a volatile Thursday amid expectations of new aid for debt-ridden Greece and conflicting reports about a possible deal on the U.S. debt ceiling.

"Agencies were unchanged to a smidgeon wider and now seem to be narrowing a bit on the news that the Greece package came through," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

Callable volumes remained strong, with investors looking for better yielding step-ups. But longer call protection was popular as well.

"People seem to be looking at longer call protection even though they can pick up more yield with shorter calls," Hurley said. "Longer protection is desired just because people seem to be downgrading their forecast for second-quarter GDP and growth throughout the year."

If the economy does poorly, that could lower yield expectations and encourage issuers to redeem existing paper.

Possible deal for Greece

Investors continued to focus on the Greece debt crisis and the debt ceiling debate in the United States.

On Thursday, European leaders were reported to agree on a new deal to help peripheral economies like Greece, Ireland and Portugal to continue meeting their debt obligations. Part of the plan included extending and reducing the cost of euro zone bailout loans to those countries.

In the United States, there was also speculation that the White House and House of Representatives speaker John Boehner were close to agreeing on a proposed deficit reduction plan that would pave the way for Congress to raise the debt ceiling by Aug. 2 and avoid a U.S. default.

The two pieces of news pulled yields in different directions, with the Greek deal thinning out flight-to-quality bids while the debt ceiling optimism eased fears about a potential downgrade of U.S. government debt.

Agencies moved in step with Treasuries on the day.

"If the government does not meet its obligations, agencies are just a step below in credit even though they're Aaa and they have an explicit backing from the government," Hurley said. "So as Treasuries go, so go agencies."

Uncertainties persist

Investors are nevertheless comfortable with continuing to buy agency debt, as evidenced by recent sales of benchmark-sized bullet issues and the brisk business being done in callables.

"It's just what's the right price," Hurley said. "The bottom line is the U.S. is not bankrupt like Greece is. We will pay our bills. The question is, is it going to be a delay in the bill paying, and is there going to be progress in the longer term for deficit reduction."

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