Agencies track swaps tighter on weak Treasury auction; market expects small Freddie Mac deal

By Kenneth Lim

Boston, July 28 - Tighter swap spreads pulled agency spreads inwards on Tuesday following a lackluster Treasury auction, while Freddie Mac was expected to offer only a small amount of Reference Notes.

The agency market had another slow session Tuesday with light volume and only a small move in spreads, an agency trader said.

Bullet spreads were 1 to 2 basis points tighter across the yield curve, the trader said.

"There was better buying across the board," the trader said. "The front end was better despite the fact that Freddie Mac's coming out with an offering tomorrow."

The agency market was tracking movements in swaps, the trader said.

"Basically swaps rates came in after the Treasury auction did not go so well," the trader said. "And agencies were basically moving with swaps."

The Treasury on Tuesday priced $42 billion of two-year notes at a high yield of 1.08%. The bid-to-cover ratio was about 2.75.

Freddie Mac to announce

Freddie Mac is expected to announce Wednesday its next offering of Reference notes.

Investors are expecting a deal in the $3 billion to $4 billion range with a maturity in the short end of the yield curve, the trader said.

"We're not expecting much," the trader said.

The agency's last offering of Reference Notes was on July 15. It sold $1 billion add on of 1.75% notes due 2012 at a stop yield of 1.77%, representing a 24 bps spread over Treasuries.

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