Agencies tighten as collateral hoarding eases; Freddie Mac plans new five-year offering

By Kenneth Lim

Boston, April 5 - Agency spreads narrowed slightly on Tuesday as supply loosened in the repo market and some profit-takers emerged.

Freddie Mac gave the market a mild surprise by announcing an offering of five-year Reference Notes.

Bullet spreads closed the day a touch tighter versus Treasuries, an agency trader said.

"In general, threes to fives are a little tighter, maybe a basis point or so," the trader said. "Three-years have been underperforming because of the three-year Treasury going in the repo market."

The callable market saw a good amount of activity, although deal sizes remained small.

"There seems to be decent activity in callables, but not on any large scale," the trader said. "It feels like a lot of smaller regional type trades getting done, and dealers are printing smaller deals and going to more downstream type of accounts."

Freddie Mac sees strong book

Freddie Mac plans to price new five-year Reference Notes on Wednesday, talked at a spread of 25.5 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.

Barclays Capital Inc., Citigroup Global Markets Inc. and UBS Securities LLC are the lead managers of the offering.

The order book was believed to be above $3.5 billion at the close of the U.S. market.

"It will probably be a $4 billion size deal...assuming they get a billion and a half or so overnight," the trader said.

The market had been expecting a three- or five-year offering from Freddie Mac, with the majority betting on a three-year deal, the trader said. So the new deal was a slight surprise, though not by much.

"I think the Street was fairly set up for it," the trader said.

Price talk represented a concession of about 1 to 2 bps over surrounding issues, making it fairly valued for a new deal, the trader said.

"I guess a basis point in the low rate environment is decent," the trader said. "The Fannie Mae deal that came a couple of months ago was well received...I did see some bids wanted against the deal."

The trader said investors have been hesitant about buying more agencies in the secondary market because of the richness of spreads and yields, but new issues often present enough of a discount to draw buyers back.

"I think accounts are reluctant to add new paper at low rates and tight spreads," the trader said. "But they're willing to switch into fairly valued new issues."

Profit-taking in Treasuries

Spreads got some tightening support on Tuesday as supply loosened up a little at the front end on the back of calmer reactions to a new change in Federal Deposit Insurance Corp. bank charges.

The new FDIC rule, which made it more expensive for banks to lend Treasuries to the Federal Reserve, came into effect on April 1 and sharply lowered front-end yields in the repo market.

"There's been a bit of a grab fest for collateral, but we're seeing a bit of an unwind now," the trader said. "It feels like there's a lot of Street activity, although most bonds are trading in dealer hands."

Investors appear to be anticipating a back-up in yields.

"I definitely think there's a sense of concern that we're on the cusp of higher rates, and I see some profit-taking and allocation out of fixed income," the trader said.

There was also a rumor, since rejected, that the Fed would do some reverse repos to put collateral back in the market and take some funds out.

"That was merely a rumor, but it shows you what people were thinking," the trader said.

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