Agencies widen but outperform swaps in quiet session; Freddie Mac skips expected issuance

By Kenneth Lim

Boston, June 24 - Agency spreads widened on Thursday amid weakness in swaps as investors continued to worry about the strength of the U.S. economy.

Freddie Mac said it would not issue any Reference Notes this week, disappointing traders who had been hoping for some supply before a two-week gap in the primary calendar.

Bullet spreads eased about 1 to 2 basis points wider across the yield curve on Thursday as the market took its cue from swaps, an agency trader said. Swap spreads widened by about 3.5 bps at the front end as investors expressed concerns about possible cracks in the economic recovery, so agencies at least outperformed.

It was a "slow day" with "nothing really agency-specific," the trader said. Agencies were "mostly following swaps out a couple of basis points."

Callable issuance was robust as yields fell, with "three full pages" of new issue deals, said Mark Noble, head of agency at MF Global.

"In general that's really been where the action's been," he said. There were "some big floaters hitting the market today out of Freddie Mac."

With the month-end approaching, the agency market looks likely to go out a little wider than at the end of May.

"We're off the tights that we were at," Noble said. "But swaps are out too, and we're outperforming swaps in general."

Freddie Mac passes

Freddie Mac disappointed the market when it said Thursday that it will not issue any Reference Notes this week.

The agency's next calendar opening is on July 14.

"That was a little bit of a surprise for most people," Noble said.

Investors had been hoping for an offering in the two- to three-year area to meet strong demand in those sectors. Spreads would normally tighten if expected supply does not materialize, but that effect was muted on Thursday as falling Treasury yields offset any supply-related tightening.

"We were under pressure from the lower yields and higher Treasury prices," Noble said.

The other trader said the Freddie Mac announcement may have hit some accounts that had been hoping to get relatively cheap on-the-run paper before the month-end. Nevertheless, spreads are affected more by what goes on in the Treasury and swap markets at this time, the trader added.

"I heard some accounts were hoping to pick up some cheap coupons, maybe get a bump immediately after pricing just in time for month-end," the trader said.

But the market now has no supply until July 7, and that could help support agency spreads as the quarter draws to a close.

"Certainly if there's no supply that would be supportive of tight spreads," the trader said. "But the market's not driven solely by technicals and supply. Demand can change pretty drastically too, with Europe still lurking in the background and the economy giving us new cause for concern."

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