Agency callables cheapen as Treasury volatility rises; new Freddies upsized, oversubscribed

By Kenneth Lim

Boston, Aug. 5 - Callables dominated action in the agency markets Wednesday, cheapening slightly on higher volatility Treasuries.

"We've been caught up with the callable markets for the most part today," an agency trader said.

The first half of the week saw massive callable issuances from Freddie Mac and Fannie Mae, the trader said.

"We had three billion-dollar deals this week, and the bigger deals trade more sensitive to Treasury volatility," the trader said. "When volatility goes up, then they cheapen up, and you can buy these up below par, which is what people were doing today."

The volatility may even have affected Freddie Mac's upsized issuance of three-year Reference Notes, the trader said.

"Investors are probably somewhat reluctant to just put orders in the books given the volatility," the trader said. "The 10-years got as cheap as 3.75% this morning, then they were at 3.64%, now they're back to 3.76%. When you see so much volatility, you get some concessions from the issuers."

New Freddie Mac tightens

The new Freddie Mac 2.125% Reference Notes due 2012 ended the day about half a basis point tighter at 37 bps over Treasuries, the trader said. They had been seen about 1 bps tighter earlier in the day, with swaps about 1 bps wider.

"I think it was very fair pricing," the trader said. "There's still a lot of demand for front-end paper, and I would include three-year paper in the front end."

Freddie Mac priced an upsized $4.5 billion of the new Reference Notes on Wednesday at a spread of 37.5 bps over Treasuries. Price talk was for a $3 billion deal at a spread of 35 bps, which was itself widened from an initial 33 bps.

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

Fund managers took 57% of the new notes, with central banks buying 22% and banks buying 11%, according to data provided by Freddie Mac. U.S. investors received 67% of the notes, while Asia received 17% and Europe 9%.

Michael Graf, head of agency trading at Barclays, said the deal was "very well received" with about $6.8 billion in orders received.

"It was the right structure at the right part of the curve," he said. "You're able to capture the client demand."

Graf acknowledged that recent issuances by the agencies have been smaller.

"Their issuance needs have been lighter as a function of the market backing up and a decreased need for funds," he said.

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