Agency spreads end mixed amid European concerns; Freddie Mac could issue front-end deal

By Kenneth Lim

Boston, Nov. 29 - Agency spreads closed mixed on a quiet Monday as late bargain hunting offset early widening amid ongoing concerns about Europe's credit stability.

Bullet spreads closed unchanged in the front end of the yield curve, an agency trader said. The five-year sector tightened in the afternoon and ended about 1 basis point narrower, while the 10-year sector remained 0.5 bp to 1 bp wider versus Treasuries at the end of the day.

"In general we were slightly cheaper across the curve, but only cheaper," said Craig Ziegler, an agency trader at Gleacher & Co. "What happened was toward the end of the day there was better buying. The five-year came in a bit, and that finished about 1 bp tighter."

Callables had a modest session, with about $2.5 billion in issuance, Ziegler said. About half of that was in short-term paper of 18 months and shorter.

Trading volumes were also slow with some leftover sluggishness from Thanksgiving week.

"People were slow to get back after the weekend," Ziegler said.

Europe stays in focus

The market saw some cheapening early Monday on persistent worries about the financial health of European countries.

The European Union approved an €85 billion bailout package for Ireland over the weekend, but investors remained concerned about potential crises in Spain and Portugal.

"Treasuries rallied this morning mostly on a continuation of the European theme," one trader said. "That's driving a bit of flight to quality trading, which tends to widen spreads across the board."

The European theme has been around since the middle of the year and could continue to pester investors for several more months as long as the issue has not been resolved, the trader said. That could keep spreads volatile until another issue takes prominence.

"We have payrolls coming up, and that could take some of the attention away from Europe," the trader said. "It's not going to go away, but it might just stay in the back seat until things on the domestic front quiet down a little and then people start to ask, 'OK, what else do we have in here?'"

Freddie Mac announcement eyed

Freddie Mac could announce a front-end offering of Reference Notes on Tuesday as part of a calendar announcement, the traders said.

"There's some talk about them doing something at the front end," Ziegler said. "Two-years are a little weak, so maybe they'll open up the November 2012 two-years."

Tuesday is also the end of the month, and the market could see some extension trading during the session, Ziegler added.

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