Agency spreads widen as market drags its feet; Freddie Mac could launch deal at front end

By Kenneth Lim

Boston, April 19 - Agency spreads gave back some of the previous week's tightening on Monday to begin the week on a weak note.

On the primary side, the market expects Freddie Mac to announce an offering of two- to three-year Reference Notes on Tuesday.

Bullet spreads ended the day a touch wider, with front-end spreads out about 1 basis point on expectation of supply from Freddie Mac, an agency trader said. Spreads in the 10-year sector also widened by about 1 to 2 bps.

The trader, whose firm usually does more callable business, said structured paper was also slow.

"There were quite a few new deals today, but overall it's just been really quiet," the trader said. "I haven't done a thing all day."

Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial, said the market appeared to be easing off the previous week's narrowing.

"Agencies obviously rallied a bunch, and people took the opportunity to take profit," he said. "So we've drifted back, all the way up to the five-year sectors."

Thin volumes

The market was "lethargic" coming out of the weekend, and the current richness of the market may be giving investors pause before making any moves.

"The market's kind of in flux," Riley said. "We've rallied a lot in Treasuries. We were at 4% [in 10-year Treasuries], we're back to 3.8% right now, so we have rallied from the 4% since the auctions. That's a heck of a move."

Investors on the sidelines may be waiting for the market to cheapen before coming back in, he added.

"It just feels like nobody wants to do much of anything," he said. "Do you buy bonds at these levels? I don't know...Some people might want to sell, but if I sell something, what do I do with the cash?"

Freddie Mac likely to issue

Freddie Mac will probably announce an issuance of two- or three-year Reference Notes on Tuesday as part of a calendar slot, both traders said.

"We're expecting something in the short end, two- or three-years," the first trader said. "Maybe five-years, but based on Libor, I don't think that's likely. But I do expect them to come. They passed the last time."

Riley said he had been hearing more speculation about a three-year deal.

Supply could be a theme for the rest of the week, with the Treasury announcing on Thursday its issuance plans for next week. But for now issuers are simply twiddling their thumbs, Riley said.

"It's wait and see," he said.

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