Agency spreads widen as Freddie Mac brings $5.5 billion of new three-year notes to market

By Kenneth Lim

Boston, March 3 - Agency spreads softened on Wednesday as Freddie Mac priced a bigger-than-expected offering of three-year bullets.

Non-callable spreads widened by about 1 to 1.5 basis points across the board, said Wall Street Access agency trader Michael Skinner.

"Spreads as a whole are a little weaker," he said.

Callable issuance was brisk, with a "fair amount" of medium-term notes written on Wednesday, he added.

"Still a lot of step-ups, so there's a lot of defensive structures," Skinner said.

Overall trading volumes were healthy, although activity could slow on Thursday as the market hunkers down before the week's non-farm payroll data is released.

"I think you saw a lot of guys do business today because we have non-farm payrolls on Friday," Skinner said. "It should be quiet tomorrow ahead of Friday's payrolls. Anyone who wanted any business done did it today."

Freddie Mac prices three-years

The highlight of the day was Freddie Mac adding $5.5 billion of new 1.625% three-year Reference Notes to the market.

The notes, which priced right at the price talk guidance of 31.5 bps over Treasuries, ended a touch wider at a spread of 32 bps bid, 31.5 bps offered.

The notes were sold at 99.86 to yield 1.671%.

J.P. Morgan Chase, RBS Securities Inc. and UBS Investment Bank were the underwriters.

The deal amount was considerably more than market expectations of around $4 billion.

"One surprise was the $5.5 billion size, which was not what most people were expecting," Skinner said.

But the additional supply's impact on spreads was limited by the strong demand for the new paper, especially with the deal giving a concession of about 2 to 2.5 bps over surrounding agency debt.

"The market can digest any amount of supply if it comes at the right level," Skinner said.

Pressure from Fed departure

The market is coming to terms with the end of the Federal Reserve's agency debt purchasing program, Skinner added.

The Fed's usual weekly purchase operation will not take place this week because of the central bank's decision to slow down the buying as the program approaches its March 31 termination.

"The Fed purchase program is running out here, so the market is losing its biggest buyer," Skinner said. "I think over time, especially at the long end, spreads should widen a little bit."

The market has mostly priced in expectations of a market without the Fed, but concerns about the lack of a "backstop" could nudge spreads out a little bit. The longer end of the yield curve will likely face greater widening pressure, but that could be countered by a lack of supply, Skinner said.

"What has helped in the long end is there's just no supply out there," he said. "It can't help spreads that we no longer have that buyer...but I think going forward it will depend on what the supply is."

© 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.