Agencies outperform Treasuries amid Greek austerity deal; Freddie Mac plans three-years

By Kenneth Lim

Boston, June 29 - Agency spreads tightened sharply on Wednesday on quarter-end extension buying and a big move away from safe-haven Treasuries after Greece passed a set of austerity measures.

Freddie Mac found strong initial response for an offering of three-year Reference Notes, which will price Thursday.

Bullet spreads came in across the board versus Treasuries and swaps, giving investors some cheer before the first half of the year draws to a close. The five-year spread narrowed by about 3 basis points against Treasuries, adjusted for the roll, and outperformed swaps by 1 bp.

"Spreads did very well today," a trader said, noting "very strong Street buying in agencies. We're at the rich end of the recent range now."

The callable market also saw good activity, although bullets dominated the day's volumes.

"Callables were also very strong, but it wasn't as strong as the bullet buying," the trader said. "People are a little cautious in front of month-end here, but we continue to see some good underwriting. On a scale of 1 to 10, callable underwriting was about 9 two weeks ago, and about 7 now."

Risk back in favor

Money poured out of low-risk Treasuries and into spread products Thursday as Greek lawmakers agreed on a set of cost-cutting measures that opened the gate to a further €12 billion in aid from the European Union and the International Monetary Fund.

Bids came fast and furious during the session amid the risk-on trade.

"Every offer gets lifted," the trader said. "It's just very strange."

Swaps tightened on news, which gave agencies an extra boost.

"Spreads in general are outperforming as Greece...led to tighter swap spreads," another market source said.

The source added that investors took the opportunity to do some extension trading as the end of the month approached.

"Basically you've got a very strong index extension in agencies coming up and so we've seen very good buying," the source said. "We've seen nothing but buying all week."

Freddie Mac draws interest

Freddie Mac saw good interest during the marketing of its planned offering of three-year Reference Notes.

The notes were talked at a spread of 29 bps over Treasuries. The size of the deal has not been set, but it is expected to be at least $3 billion.

Barclays Capital Inc., Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC are the lead managers of the offering.

"The deal is going well," the source said. "The book is north of $5 billion [at the close], and so I expect it to go well."

Price talk represented a "pretty sizable" concession of about 2 bps to 3 bps to surrounding issues, which may explain the strong response for the deal. But Freddie Mac will probably not issue too much even if it could because it does not have the funding needs.

"I don't think they're going to upsize it too much" the source said.

The deal was a little bit of a surprise for investors, who were expecting a shorter-term deal.

"I don't know if they had a lead going into the deal, but the market was looking into a new two-year or a pass altogether with them on the calendar again next week," the source said. "Someone may have had a large indication of interest that prompted them to go to the three-year sector, and if that's the case I imagine the bonds will be swept up and put away quickly."

Freddie Mac has another calendar announcement on July 6.

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