Agency spreads unchanged as investors seek higher rates; Freddie Mac reopens three-years

By Kenneth Lim

Boston, April 20 - Agency spreads closed flat on Tuesday as investors remained reluctant to put their money to work in a rich market.

Freddie Mac sold $1 billion of new three-year Reference Notes in a reopening, which led to some tightening in the morning because investors had been hoping for a bigger deal.

Bullet spreads ended the day flat to slightly looser on light volumes Tuesday.

"Spreads are basically unchanged," an agency trader said, noting spreads were "a little bit firmer well off the curve, but for the most part unchanged to a bit wider."

Callable issuance slowed down from Monday, when Federal Farm Credit Banks added more than $1 billion in callable supply.

"There are still a lot of deals out there, but volume-wise it's quieter than yesterday," the trader said.

Market malaise

Trading volumes were weak across all sectors, the trader added. Even callables, which have drawn strong demand because of their defensive nature, were quieter than usual.

"Callable spreads are now extremely tight relative to the underlying bullets," the trader said.

Investors are staying outside the gates hoping for the market to cheapen and for yields to rise, the trader said.

"This rally's kind of taken the steam out of the fields, so to speak," the trader said. "Everyone knows there's supply round the corner, and everyone's pining for higher rates."

The market has been better for rates sellers in the past few days, the trader added. Investors who would normally go short are also cautious about making a move.

"The Greece thing is just lingering, and the Goldman Sachs story on Friday, once that broke, we ratcheted higher," the trader said. "The general tendency on the Street is to get short, but the problem is those who get short keep getting burned, and each time they get run over they're less likely to get short again."

For now, investors who can afford to wait will wait.

"We got a little bit today of clients sniffing around looking to buy, but we're still 10 to 20 basis points tighter than the wide end of the range," the trader said. "I think accounts that have the ability to be patient are being patient. We've had two weeks without Treasury supply. On Thursday we get the announcement, so the Street's going to have to make room for that."

Freddie Mac reopens three-years

Freddie Mac priced a $1 billion reopening of 1.625% three-year Reference Notes on Tuesday at a stop-yield of 1.75%, according to a press release.

The notes were sold at 99.636525 through an auction. The agency said 11.111% of the notes were allocated at the stop rate. The bid-to-cover ratio was 4.13.

There are now $6.5 billion outstanding principal amount of the notes.

The notes widened by about 1 bp to close at a spread of 14 bps over Treasuries after pricing at about a 13 bps spread in the auction, the trader said.

The agency's decision to reopen the notes instead of issuing a benchmark-sized series disappointed the market and led to some tightening in the shorter end of the yield curve.

"The Street was kind of hoping for a front-end deal, and some thought possibly that they could come with a five-year deal, and when they didn't we adjusted a little bit tighter," the trader said.

© 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.