Agencies widen further on supply worries; Freddie Mac raises talk on three-years to T+35 bps

By Kenneth Lim

Boston, Aug. 4 - Agency spreads continued to move out slightly on Tuesday on light volume ahead of an expected $3 billion deal from Freddie Mac, market sources said.

"The only fireworks we had today was Freddie Mac coming with the three-years," an agency trader said. "The whole market was hoping for a two-year, we haven't had any new two-years in about five months."

Bullet spreads were about 1 basis point wider across the yield curve, which was "a little disappointing" after the expansion on Monday, the trader said.

"I think some of that widening was just guys making room in the three-year sector for the new one, and a little bit of profit-taking in this narrowing that we saw last week," the trader said.

But many investors were keeping on the sidelines ahead of the U.S. Treasury Department's Wednesday announcement on its August refunding.

"Flows were fairly muted today," the trader said.

Freddie Mac deal seen oversubscribed

Freddie Mac raised price talk on its planned offering of three-year Reference Notes to about 35 bps over Treasuries from an initial 33 bps, market sources said.

The deal amount was set at $3 billion, but subscriptions had already shot north of $6 billion by the end of the day.

JPMorgan Chase, Barclays Capital, Inc. and Deutsche Bank Securities, Inc. are the lead dealers on the offering.

The deal could be upsized given the strong demand, the trader said.

"They might tighten it in a little if they've got a lot of demand, or they might raise the size and keep the spread at 33 over," the trader said, speaking before talk was widened later in the day. "Just looking at swaps, I think they may bring it to $4 billion and leave it at 33...because swaps didn't move."

The trader said the market would have preferred if Freddie Mac came out with an offering of two-years instead of three-years because the last new issue of two-year agencies was about four to five months ago.

"I think clients right now if they want to do two-years, they've got to do old 11s," the trader said. "There's no current-coupon twos right now."

The agency does not need a lot of funding right now, and are "doing these new issues just to keep the name out there," so there is little reason not to offer something in the two-year space, the trader said.

"That's more annoying than anything else," the trader said. "If they're just issuing this to keep the area liquid, they should just do twos because we need more new paper there."

The trader also noted that the agencies could be beginning to pare their portfolios, which they are required to do from 2010.

"They don't seem to need a lot of funding," the trader said. "That would imply to me they are willing to let a lot of stuff just run out. So are they officially reducing their portfolios? No. But anecdotally, it seems yes."

Treasury announcement expected

The Treasury could announce a record $75 billion of Treasury securities for its August refunding on Wednesday, Cantor Fitzgerald's rates analysts said in a research note.

The August package should comprise $37 billion of a new three-year note, $23 billion of a new 10-year note and $15 billion of a new 30-year bond, wrote Cantor chief fixed income rates strategist George Goncalves and rates desk strategist Amrut Bharambe.

The Treasury could also announce an expansion of the Treasury Inflation-Protected Securities program, the analysts wrote.

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