Agencies slip wider as Freddie Mac announces new three-year deal; month-end trading dominates

By Kenneth Lim

Boston, May 31 - Agency spreads widened slightly at longer maturities on Tuesday as coming supply from Freddie Mac helped to steepen the yield curve.

Bullet spreads closed the day a touch wider, an agency trader said.

"Today was a little bit steeper in threes and out obviously on Freddie Mac and a new three-year deal," an agency trader said.

The callable market was more robust, but currently low yields were crimping demand for new paper even as issuers have been redeeming older paper.

"Bonds are getting called, but they're not getting replenished, and if they are they're at richer levels, so the net-net is more money on the sidelines," the trader said.

Investors would like to put their money in cheaper assets, but are having trouble finding comparable investments with the same risk profile and liquidity as agencies. Some structured products have benefited from that phenomenon.

"I've noticed a proliferation of longer-range floaters, and long-range step-ups that typically are symptomatic of an environment where accounts are reaching and searching for yields."

Freddie Mac plans three-years

Freddie Mac said Wednesday that it planned to price new three-year Reference Notes on Wednesday.

Price talk was set at a spread of 27 bps over Treasuries, market sources said. The size of the deal has not been set, but it is expected to be at least $3 billion.

Credit Suisse, Citigroup Global Markets and UBS Securities are the lead managers of the offering.

The order book was over $3.5 billion near the end of the trading session on Tuesday, with demand seen to be reasonably strong.

"It looks to be a couple basis points concession, so I expect the deal to go well," the trader said.

The market was not very surprised by the announcement of the deal, if only because funding levels are very attractive for issuers at the moment. In a year when the housing market is still struggling and funding needs are low, and Fannie Mae and Freddie Mac are trimming their portfolios, investors are also eager for new supply.

"Any new issue is welcome," the trader said.

A lot of investors are still searching for liquid assets, and the offering seemed to be fairly valued to cheap, the trader added.

One possible handicap for the offering is the low absolute yield level at the moment, which makes coupons look less attractive.

"There are certainly more buyers when we're 30 bps higher from here," the trader said.

Market fights yields

Investors were reluctantly dragged into the market amid dropping yield levels as Treasuries continued to improve in price.

"I think retail and the Street alike are continuing to fight this market," the trader said. "But every time we tick down further, we see more covering."

Most of the activity on Tuesday came from month-end window dressing.

"It's been kind of a funny day, dominated by some electronic trading screens popping with a lot of month-end stuff, and a lot of portfolio reconfiguring," the trader said.

The rest of the week could be quiet as the market awaits Friday's labor report, the trader added.

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