Agencies outperform Treasuries, but yields rise on stock rally; Freddie Mac two-years eyed

By Kenneth Lim

Boston, July 13 - Agency spreads tightened slightly on Tuesday, holding their ground versus Treasuries amid a general flight from bonds.

Bullet spreads narrowed by about half a basis point at the front end of the yield curve and by about 1.5 bps on the longer end, said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

"So agencies did improve relative to Treasuries," she said, "meaning they just went down at a slower pace than Treasuries did."

But absolute yields actually rose as the strong rally in equities drew capital away from the fixed income space.

"Yields are higher," Hurley said.

Slow session

Trading volumes remained thin in the summer heat and a lack of major news.

"Trading volumes are probably lighter than normal," Hurley said. "But we did have the 10-year Treasury auction, and it did spark a bit of interest, but otherwise it was very light. It's the middle of the summer."

The market's richness has also put a damper on potential buying interest.

"I really think in order for there to be some significant buying going on, the whole market needs to have a little bit more concession to it," Hurley said. "We're very tight."

But while bullets struggled to find action, callable issuance showed no signs of slowing on Tuesday, as absolute yields remained low and older paper continued to get called.

"A lot of activity in callables," Hurley said. "Issuance was heavy. They issued about $5 billion today...obviously with callables you get a better pickup in yields, so that's creating some demand there."

Freddie Mac ahead

Freddie Mac could announce a deal at the front end of the yield curve on Wednesday when its issuance calendar opens, Hurley said.

The trader expects a sizable offering from Freddie Mac, which has not issued any benchmark-sized Reference Notes since May 27. The agency's previous offering was for $6 billion of two-year notes.

"I'm hearing that it should be approximately $5 billion and that it should be a two-year," Hurley said.

The market has yet to set up for the offering and will likely do so only after Freddie Mac makes its announcement, she added.

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