Agency spreads widen on Treasury drop, valuation concerns; Freddie deal seen at 22-25 bps

By Kenneth Lim

Boston, July 14 - Higher Treasury yields and valuation concerns pushed agency spreads wider Tuesday, ahead of an expected offering by Freddie Mac.

Agency spreads were about 2 to 3 basis points wider across the yield curve Tuesday, said Guggenheim Capital Markets head of fixed income rates trading Thomas L. di Galoma.

"I think selling pressure in Treasuries obviously forces accounts out of agency longs," di Galoma said.

Treasury yields jumped higher Tuesday following better inflation numbers, with the 10-year Treasury yield rising about 11 basis points over the day.

The market is also feeling some of the effects of a strong spread contraction in the previous few weeks, di Galoma said.

"The Fed's buyback has been a little bit weaker generally," he said. "I think the weakness of the bidding by the Fed is sort of being felt by the market as sort of less interest in them, and maybe the sense that agencies are fully valued."

The Federal Reserve, which has been buying agency securities on the open market, should continue to be committed to its purchasing program, di Galoma said. But its level of interest may not be as strong with agency spreads as tight as they were at the start of the week.

"I think maybe their appetite is maybe waning just a bit," he said.

Freddie deal expected

Freddie Mac, which has scheduled an announcement on Reference Notes issuance Wednesday, is expected to offer about $3 billion of two-year notes at a spread of 22 to 25 bps over Treasuries, di Galoma said.

But the market will not be surprised if the deal is skipped, he noted.

"They could very well not do anything...it's a bit unpredictable at this point," he said.

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