Agency spreads widen on Treasury strength, expectations of Freddie Mac three-year offering

By Kenneth Lim

Boston, March 1 - Agency spreads eased slightly on Monday on the back of anticipated supply in the three-year sector and continued strength in the Treasury market.

Bullet spreads were "a touch wider" across the yield curve, an agency trader said.

"The three-year market's sensing we could get some supply," the trader said. "Swaps are a basis point and a quarter tighter, so we're slightly behind swaps."

Callable issuance was also slower than usual, with callable spreads a touch wider because of higher Treasury prices, the trader said.

"We saw a lot of issuance on the negotiated side, but for the most part it was a slower day, obviously due to the uptick in the market," the trader said. "But we've seen heavy, heavy issuance on strong pullbacks and it's cleaned up as the market rallies."

Trading volumes remained thin with the agency market seen as still relatively rich at the moment, which has pushed potential buyers to the sidelines.

"It's still fairly quiet," the trader said. "Anytime we get this grinding higher in Treasury prices, there's a pullback and accounts willing to wait will wait. We're also getting a ton of competing supply from supra-sovereigns and corporates, so the patient investors are waiting for the concessions to be built in."

But the trader was confident that the buyers are still lurking and only need an opportunity to show themselves.

"I think there's still a boatload of money out there...from money markets, callables getting redeemed, corporate bonds where spreads have tightened," the trader said.

Trace reporting begins

The Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine began reporting on agency trades on Monday, but the light market volumes meant that the change did not have too big of an impact on market participants, the trader said. And it appeared that not all issues had been reported yet.

"I haven't had a ton of flows today, so it's minimally impacted me," the trader said. "But it certainly takes some getting used to. I think it's going to be a headache for some shops that are a lot more active."

But the trader said the Street should eventually get used to Trace reporting in the large agency market because "most shops have dealt with Trace on corporates," although the additional transparency may not be that great.

"It should increase transparency a little bit, especially in the off-the-run stuff, but we're already a pretty transparent market," the trader said.

Freddie Mac three-year possible

Investors also seemed to be betting that Freddie Mac will announce an offering of three-year Reference Notes on Tuesday, the trader said.

"I'm looking at three-year spreads right now and we're about 2 bps wider on the day versus Treasuries, so the Street's sensing that they may come in that sector," the trader said.

The trader added that the agency appeared to be "canvassing the Street to see what kind of interest there is out there" on Monday.

Three-year spreads are currently around 12 bps below swaps and about 21 bps over Treasuries, which is "right in line with where stuff's been getting done," so a three-year Freddie Mac deal could be announced, the trader said.

"The only downside I see is you lose a lot of rate buyers at current levels, which could crimp demand a little bit, but from a spread perspective, it's something that they could do," the trader said.

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