Agency spreads little moved on oversubscribed Freddie Mac deal, weak Treasuries

By Kenneth Lim

Boston, July 15 - Agency spreads were unchanged to slightly tighter Wednesday on selling in the Treasury market and an oversubscribed issuance by Freddie Mac.

"Spreads were pretty much unchanged today," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co. "Maybe just a basis point tighter, just on the deterioration in the Treasury markets."

Movement in the Treasury markets was seen as the biggest driver of agency spread changes.

"The Treasury market's driving everything," one trader said. "With equities rallying as much as they are, we're seeing increases in rates, and that's just driving the market."

Hurley agreed, adding: "Treasuries are going to be the main driver no matter which way we go."

Freddie raises $1 billion

Freddie Mac priced $1 billion of 1.75% Reference Notes due June 15, 2012 at a stop yield of 1.77%, according to a press release.

The stop yield spread in the auction was 24 basis points over Treasuries. The bid-to-cover ratio was 3.275 to 1.

"I thought the Freddie deal was priced about where they were talking," Hurley said.

The market had been expecting a small deal of around $2 billion, and Hurley said the shortfall was not a big concern.

"At this size that we're at, with the billions, I don't think it matters a whole lot," she said.

Competing forces

Hurley noted that the June minutes of the Federal Reserve's Federal Open Market Committee appear to be bearish, and that could keep agency spreads volatile in the "foreseeable future." Negative macroeconomic sentiment will pull spreads one way and declining supply the other, she explained.

"I think either factor can win," she said.

The markets are currently swinging from one end to the other of those two factors, and the contraction in spreads in the previous few weeks was probably "overdone," she said.

But if yields improve, investors could find value in the fixed income space, Hurley said.

"I certainly think if the market deteriorates and yields go up, it presents an opportunity for people to buy fixed income securities," she said. "I think overall there's a limit to how much higher rates can go, just the fact that you do have a weak economy, and that's going to counterbalance supply. When you do have a backup in yield, it does open the door to buy paper at more realistic yield levels."

© 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.