Agencies narrow modestly as Freddie Mac surprises with reopening in five-year sector

By Kenneth Lim

Boston, May 19 - Agency spreads tightened slightly on Thursday as Freddie Mac sold a rare tranche of notes in the five-year sector.

Bullet spreads came in by about half to 1 basis point versus Treasuries, an agency trader said.

"Agencies had a decent day," the trader said. "We saw some good flows, especially in the five-year sector because of the Freddie Mac reopening. Spreads came in in the morning with yields increasing; then we gave up a little bit in the afternoon as yields started to come back down."

The callable market also saw robust activity, but mostly in the secondary market, the trader said.

"There's still a little bit of reluctance to buy new coupons at these yields," the trader said.

But the trader said demand for new callables should pick up quickly the next time yields rise.

"There's been a number of redemptions and there hasn't been a corresponding volume of new issues," the trader said. "Some of that money's gone to other higher-yielding asset classes like equities, but a lot of it is just sitting there and waiting for a back-up to come back in."

Freddie Mac reopens five-year

Freddie Mac sold $1 billion of its 2.5% Reference Notes due May 2016 in a reopening on Thursday.

The notes priced at a spread of 22 basis points over Treasuries through an auction, according to a press release. The notes were sold at 102.036654 to yield 2.07%.

Bids for the notes were 3.02 times the amount offered, Freddie Mac said.

After the reopening, there are now $4 billion of the notes outstanding.

The notes came about one-half basis point cheap to surrounding issues and tightened a touch on the day, the trader said.

"They went out about 21.5 bps over Treasuries," the trader said. "It was a very well-received deal, a lot of interest for the paper."

The market had not been expecting a five-year offering, given that the agencies have mostly been issuing in the two- to three-year sector this year, the trader said.

"I suppose at these levels it was something they could do," the trader said. "The Street was happy to finally get some supply in that sector, even though it was only a small reopening."

The market easily absorbed the additional supply, but the offering did help the front end to narrow slightly.

"Twos and threes came in a little when it turned out there wasn't going to be any supply there," the traders said.

QE2, economy in focus

The trader expected the market to slow down for the rest of the month, with uncertainties about the economy and about the end of the current round of quantitative easing in June keeping new money at bay.

"I think the majority thinks there will be higher rates after QE2, but there's no strong consensus," the trader said. "The market's actually split on this, and I think that's going to create a lot of volatility as we enter June."

Agency spreads should nevertheless enjoy some support from the diminishing supply as Fannie Mae and Freddie Mac cut down their mortgage portfolios.

"In terms of spreads it's very supportive, but in terms of liquidity it's not ideal," the trader said. "It's tough to be a trader in agencies these days."

The coming summer slowdown could exacerbate the market's volatility, the trader said.

"Liquidity is going to be even thinner after Memorial Day," the trader said.

© 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.