Agencies tighten as cheapness draws buyer interest; Freddie Mac could reopen at front end

By Kenneth Lim

Boston, Feb. 9 - Agency spreads narrowed slightly on Tuesday as investors bought on hopes that the European Union will act to support debt-laden Greece.

The market was also seen to expect only a small offering of Reference Notes on Wednesday by Freddie Mac.

After about two weeks of slow but steady widening, bullet spreads tightened by about 1 basis point across the board on Tuesday, said Mike Goldman, head of agency trading at Guggenheim Partners.

"Today was the best they've done in a while," he said. "We kind of had a slow bleed for a while...Today's the first day that we're actually slightly tighter than when we went out yesterday."

Callable issuance picked up after a slow Monday, resuming the strong pace that has characterized the past several months.

"It keeps going," Goldman said. "It remains strong."

Trading volumes were better than on Monday but still relatively slow, Goldman said.

"I'm not sure the volumes are so much better, but it's been exceptionally slow," he said. "Today you saw a little bit more activity."

Buyers return

Buyers found an opportunity to pick up agency paper after the previous weeks' widening, Goldman added.

"It's cheapened enough, I guess," he said. "The longer stuff is probably 15 bps cheaper than where it started from...They've sort of reached a level where the buyers are coming back out."

Spread markets also improved as concerns eased about the heavy debt burden of Greece. Over the past week, worries about default risks from the Mediterranean country sent equity and spread markets falling. But investors speculated on Tuesday that E.U. officials were formulating a plan to help Greece after European Central Bank president Jean-Claude Trichet made plans to meet with E.U. officials on Thursday.

"The other thing is risk assets in general have done better today," Goldman said. "With the risk story potentially improving, everything's better today."

Everything except Treasuries, which lost some of their recent strength as the flight-to-quality trade took a back seat on Tuesday.

Market participants had said they would be looking at the week's Treasury auctions as a guide for the market, and Tuesday saw a poor auction of $40 billion of three-year Treasury notes. The auction had a bid-to-cover ratio of 2.83, lower than recent three-year auctions. But Goldman said the weak auction was not a surprise.

"With the risk assets trading better today, it's going to cause Treasuries to trade worse," he said.

Goldman said whether the market can hold on to Tuesday's tighter levels will depend on how the Greece situation develops.

"But I think we're probably due for a little bit better trade in the near term," he said.

Freddie Mac could reopen

Freddie Mac is not expected to launch a large offering on Wednesday when it is scheduled to make an announcement on Reference Notes, Goldman said.

Other market participants had said they were expecting an offering in the two- to three-year sectors.

"Probably something short," Goldman said. "If I had to guess, I'd say something in the short end, but small. I don't think their needs are big."

The government-sponsored enterprise could also pass on an offering, similar to Fannie Mae on Feb. 2, although Fannie Mae has another calendar issuance opening on Feb. 25, whereas Wednesday is Freddie Mac's only scheduled date for the month.

"I think it's possible that they could pass," Goldman said.

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