Agencies narrow as Greek fears abate ahead of vote; Freddie Mac could offer front-end deal

By Kenneth Lim

Boston, June 28 - Agency spreads tightened Tuesday in line with swaps as investors gained confidence that Greek lawmakers would pass a critical set of austerity measures.

Bullet spreads narrowed by about 2 basis points to 3 bps versus Treasuries across the yield curve, an agency trader said.

"It was a very good day," the trader said. "We were kind of piggybacking on swaps."

Trading volumes picked up from Monday's lackluster session as the two-day backup in yields gave some investors an entry point just before the end of the quarter.

The two-year Fannie Mae 0.5% notes due August 2013 closed at 15 bps over Treasuries, while the three-year Freddie Mac 1% notes due July 2014 went out at about 24 bps over Treasuries. The 2.5% Freddie Mac notes due May 2016 closed at 25 bps over Treasuries.

Greek relief

Yield levels rose on Tuesday as Greek lawmakers discussed proposed budget-cutting measures that would allow the country to receive more aid from the European Union and the International Monetary Fund.

The Street expected the measures to be approved later in the week, and investors shifted away from safe-haven assets into higher-yielding segments.

The improved sentiment about Greece led swap spreads to tighten. Agencies, which often move in sympathy with swaps, also came in versus Treasuries.

"Spreads came in today, kept up with swap spreads as part of the whole risk-on trade," the trader said.

The shape of the yield curve nevertheless steepened in line with Treasuries, although not to the same extent.

"It's not keeping up with the sell-off in Treasuries as far as the curve goes, although on an absolute yield basis it's following Treasuries," the trader said.

The premium versus Treasuries could increase as the week goes on with more Treasury supply coming on Wednesday and little expectations for a negative vote in Greece.

"I do think we will see spreads continue to tighten," the trader said. "The only exception would be if something were to happen in Greece."

Freddie Mac eyed

The Street had also priced in expectations of a front-end issuance of Reference Notes by Freddie Mac, which will make a calendar announcement on Wednesday.

"Consensus seems to be a new two-year or three-year," the trader said. "If they do pass you will see spreads come in."

The trader said that coupon levels and swaps currently favor issuers, which could make it attractive for Freddie Mac to issue paper. But the agency also has considerations other than pricing.

"Funding levels are good, but the only problem is needs," the trader said. "If they don't have funding needs they won't do a deal."

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