Agencies widen as Freddie Mac talks three-year notes at 22 bps over Treasuries; MBS eyed

By Kenneth Lim

Boston, Aug. 18 - Agency spreads widened slightly on Wednesday as Freddie Mac announced an offering of three-year Reference Notes.

Bullet spreads closed about 1.5 to 2 basis points narrower in the two-year sector, while spreads moved out by 1 to 2.5 bps in three-years and out.

"Agencies are feeling a little bit heavy today," said Mark Noble, head of agency at MF Global. "We have the new issue from Freddie Mac, the overall Treasury rally, and mortgage bonds continue to widen."

Trading volumes in general were light.

Callable issuance continued at a brisk pace, especially in step-up structures.

"Callable issuance remains somewhat robust, but more in the step-up type structure," Noble said. "We continue to see a lot of bonds getting called away. Smaller accounts are reinvesting, but some of the bigger accounts are holding off on their reinvestments."

Noble added that a number of new callable issues have also come with longer maturities because investors need to maintain their returns even after their holdings are called.

"The only way to get those same coupons is to head further out the yield curve," he said.

Freddie Mac plans deal

Freddie Mac plans to price new three-year Reference Notes on Thursday, talked at a spread of 22 bps over Treasuries, market sources said.

Price talk was initially set at 21 bps over Treasuries, but the spread was widened in line with the market later in the day.

The size of the deal has not been set, but the offering amount was indicated at $3 billion to $4 billion.

Barclays Capital Inc., Deutsche Bank Securities Inc. and UBS Investment Bank are the lead managers.

The notes will be non-callable.

Noble said the Street had been expecting a three-year offering from Freddie Mac, so the announcement was not a surprise.

"Three-year has the best level for Freddie Mac to issue at," Noble said.

Mortgage-backed shadow

The agency market has also been feeling some spillover pressure from the widening in agency mortgage-backed securities.

A surprising increase in refinancings have catalyzed the sell-off in agency mortgage-backed debt, but the related rise in supply as those refinanced mortgages are resold is making matters worse.

"Mortgage bonds continue to widen, and that's the bigger situation for the agency market," Noble said.

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