Agency spreads widen as Freddie Mac plans new three-year notes; offering 'priced to sell'

By Kenneth Lim

Boston, March 2 - Agency spreads widened on Tuesday as Freddie Mac announced planned issuance in the three-year sector, although market participants were encouraged by an uptick in volumes.

Bullet spreads expanded slightly on Tuesday and lagged swaps for a second day, an agency trader said.

"Agencies continue to drift wider versus swaps," the trader said. "We've had a tightening in swaps pretty much across the curve. With new supply introduced into the marketplace, they're naturally going to have some trouble with spreads."

Callable issuance was robust, although deal sizes remained on the smallish end of the spectrum.

"We're seeing some decent callable flow, just people chipping away at, but no mega deals done," the trader said.

But trading activity finally picked up after a couple of slow weeks, and buyers were spotted showing stronger interest.

"Generally speaking I saw better buying pretty much across the curve today," the trader said. "It was one of the busier days. We saw buying that was definitely not huge or large, just very steady and consistent."

Freddie Mac sees good response

Freddie Mac's planned offering of new three-year Reference Notes saw strong demand during marketing on Tuesday, the trader added.

"It's apparently going very well," the trader said. "I think they already have $5.5 billion in the books. Obviously the trade will go through Asia now, where I think we'll see some add orders, but probably nothing too crazy."

The benchmark-sized offering prices on Wednesday, with price talk at an initial spread of 31.5 basis points over Treasuries, market sources said.

J.P. Morgan Chase, RBS and UBS Investment Bank are the underwriters.

Price talk represented a concession of about 2 to 2.5 bps over existing three-year agency debt, the trader said, putting it at the cheap end of comparable paper.

"They priced it to sell," the trader said. "I think they wanted to get off a pretty aggressive sale while the Fed's still buying."

The Federal Reserve's $175 billion agency note purchase program ends March 31, with about $166.5 billion already bought.

The size of the deal will probably be around $4 billion, the trader added, although a strong book in Asia could push up the amount.

"I think you're probably going to look at $4 billion," the trader said. "If something major comes out of Asia, maybe $5 billion, but there's going to be some price tension if you see that."

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