Agency spreads narrow in twos, widen in fives; Freddie Mac talks five-year Reference Notes

By Kenneth Lim

Boston, Jan. 5 - Agency spreads widened at the belly of the yield curve and narrowed at the front end on Tuesday in reaction to Freddie Mac's decision to offer new five-year Reference Notes.

Meanwhile, callable issuance seemed slightly lighter with investors holding back ahead of payroll figures later in the week.

Bullet spreads narrowed by about 2 basis points in the two-year sector, while five-year spreads expanded by the same amount on Tuesday, an agency trader said. The see-saw was a response to Freddie Mac's announcement of a benchmark-sized offering of new five-year Reference Notes.

"We were all expecting a new two-year just given the price action over the last couple of days," the trader said. "The two-years were 4 bps wider on the week going into today, while the threes, fives and 10s were actually coming in. But they actually announced a new five-year, and that was definitely a surprise. No two-years at all."

Most of the trading on Tuesday was concentrated on the two- and five-year sectors, the trader said. Front-end subordinated paper by Fannie Mae and Freddie Mac has also been trading at a brisk pace after the Treasury said it would fund the two agencies for as much as necessary in the next three years to keep them at positive net worth.

Fannie Mae's 6.25% subordinated notes due February 2011 traded around 10 bps over two-year Treasuries on Tuesday, compared to around 40 bps before the Treasury's announcement on Christmas Eve.

"There's a lot of demand for subordinated paper at the moment," the trader said. "A lot of three years and in subordinated paper. A lot of accounts missed the opportunity last year to sell their subordinated notes; now they're getting another chance to sell."

Freddie Mac offers five-year notes

Freddie Mac plans to price new five-year Reference Notes on Wednesday with price talk at a spread of about 27.5 bps over Treasuries, market sources said.

The size of the deal has not been set, but it will be benchmark size, or at least $3 billion.

Barclays Capital Inc., Deutsche Bank Securities Inc. and Citigroup Global Markets Inc. are the lead managers.

Initial market speculation had vacillated between an offering in the two- and five-year sectors, but investors appeared to zero in on twos going into Tuesday.

"I think with the price action this week guys had given up on the five-years," the trader said.

Price talk looked reasonably attractive against existing agencies, with January 2015 paper currently trading at a spread of around 21 or 22 bps, the trader said.

But against other fixed income offerings, especially supranationals and sovereigns, the deal could be rich, the trader added.

"It should go reasonably well," the trader said. "It looks good versus existing agencies, but it's expensive against competing supra-sovereigns, although they're more liquid. I think investors who want to buy and hold will buy supra-sovereigns. Those looking to trade will buy these."

Callables watching data

Callable issuance, which had been brisk most of the previous week, thinned out a little on Tuesday with the market waiting for Friday's non-farm payrolls data.

"At these higher levels, guys don't want to buy too much," the trader said.

Most of the trading in callables this week has been on deals that were priced in the last two weeks of 2009.

"There's a lot of paper printed last week that has been moving out the door this week," the trader said.

© 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.