Agencies mostly flat, widen at long end on new risk appetite; Freddie Mac sells two-years

By Kenneth Lim

Boston, May 27 - Agency spreads widened slightly on the long end of the yield curve on Thursday but mostly kept pace with Treasuries as the market unwound the previous session's risk-aversion trades.

Freddie Mac wrapped up a strong offering of new two-year Reference Notes that added $6 billion to supply.

Bullet spreads widened by about 1.5 to 2 basis points on the longer part of the curve on Thursday, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co.

"The intermediate part of the curve, out to about 10 years, was about unchanged," she said.

Callable volumes were quieter than earlier in the week.

"There were a number of items issued today, but it was definitely quieter today than earlier in the week," Hurley said. "I'm sure a lot of that is due to month-end coming up tomorrow and also the long weekend."

Trading tapered off as the day wore on, with the market appearing to wind down ahead of the coming Memorial Day holiday on May 31.

"It was heavier in the morning, but as I said, a lot of people are closing their books for month-end, and also leaving early for the long weekend," Hurley said.

The market was moving in line with Treasuries, with both markets seeing some outflows as investors' fear meters turned lower on reassurances by China regarding Europe's credit crisis.

"It's just as the elimination of the flight to quality bid was going on, Treasuries were hurt, and agencies on the longer end were a tad wider," Hurley said.

Freddie Mac sells two-years

Freddie Mac priced $6 billion of new 1.125% two-year Reference Notes on Thursday at a spread of 29 bps over Treasuries.

The notes sold at 99.918 to yield 1.163%. Price talk was at a spread of 30 bps over Treasuries.

J.P. Morgan Chase, Citigroup Global Markets and Goldman Sachs & Co. were the lead managers.

"I thought that it came pretty much right where it was being advertised," Hurley said.

Freddie Mac's ability to sell $6 billion of paper was a reflection of the strong demand in the marketplace for new agency debt at the front end of the curve.

"It was a two-year maturity, so it was easier to get rid of, easier to place than longer-term debt," Hurley said. "I think it went well."

Month ends wider

The agency market will probably end the month wider than when it began because of the flight to quality that hit all spread products over the past month, Hurley said.

Agencies outperformed swaps in May but paled in comparison to Treasuries, which remain the safe haven of choice among skittish investors.

"I would have to think we're definitely wider, definitely due to the risk aversion trade, which has really helped to support Treasuries over everything else," Hurley said.

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