Spreads loosen a bit as renewed European fears drive Treasury rally; Freddie Mac deal expected

By Kenneth Lim

Boston, Sept. 7 - Agency spreads widened slightly on Tuesday as the market mostly managed to keep up with rallying Treasuries.

Bullet spreads closed about half of a basis point wider across the yield curve, with the front end underperforming slightly.

"I'd call them marginally softer," an agency trader said. "The market opened up fairly well bid on the back of swap spreads tightening in. Agencies tried to follow in tighter, but there's a fairly decent overhang of supply out there, and this applies not just to agencies but all other spread products as well."

Trading volumes were a tad slow but still an improvement from most of the previous week, another trader said.

"I think it was a pretty decent day," the second trader said. "Things were still a little bit slow coming out of the weekend, but on the whole I'd say activity was not bad."

Renewed concerns

Concerns about the health of Europe's financial system, which had taken a back seat to domestic fears, returned on Tuesday following reports that questioned the stability of the continent's banks.

Those concerns helped Treasuries to rally following three straight days of sliding before the long Labor Day weekend.

"Treasury bulls were just waiting for something like this to pounce on," the second trader said. "They were patiently watching rates go higher last week, and they got their chance after the holiday."

Agencies have held up well versus Treasuries largely because the market is still facing a lack of supply.

"Demand is still very strong for agencies," the trader said. "When people want to buy agency bullets for whatever reason - they could be shifting out on the risk curve or looking for better-yielding Aaa products - they find that there's not enough supply, especially in longer maturities. When they want to sell, that lack of supply kind of cushions the blow."

Freddie Mac ahead

More supply could be coming this week, with Freddie Mac expected to announce an offering on Wednesday as part of a calendar opening.

"I'm expecting something at the front end," the second trader said. "Two or five years. There's good demand in those sectors."

The trader said Freddie Mac, which skipped its previous calendar slot just before the weekend, is unlikely to pass again.

"Their next slot is October 19, which is more than five weeks away, and the last time they issued was Aug. 18," the trader said. "They're probably not going to go two months without issuing anything. The market looks like it's coming back to life, so it's going to be easier than last week to get a deal done."

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