Agency spreads end unchanged on rosier economic data; Freddie Mac five-year oversubscribed

By Kenneth Lim

Boston, Sept. 9 - Agency spreads closed mostly flat on Thursday as Treasury yields rose, while Freddie Mac saw strong demand for its new five-year notes.

Bullet spreads ended slightly mixed but mostly hovering around the previous day's levels.

"Spreads have held in pretty well," said Michael Skinner, an agency trader at Wall Street Access. "What we've seen lately is as Treasuries fall, spreads hold in, and when Treasuries rally, spreads widen out a little."

Trading volumes remained thin in the holiday-shortened week, but callable activity picked up on the lower absolute rates.

"With rates backing up the way they have, I think you saw a lot of call issuance today," Skinner said. "I can't tell you how much was put away, but it was one of the more active days for underwriting new issues in a while as they try to take advantage of the back-up."

Treasuries ease

The Treasury market retreated for the second day in a row as the trade balance report was better than expected.

The U.S. trade deficit narrowed more than the Street was expecting in July, to $42.8 billion. The Department of Labor also reported a 27,000 drop in initial jobless claims.

"The data from last week and this week seem to suggest that some of the earlier pessimism about the economy was overdone," a government bond trader said.

Agencies mostly kept pace with Treasuries, mirroring their recent moves as Treasury prices gained, the trader said.

"I think front-end agencies and Treasuries are going to be moving hand in hand for a while," the trader said. "Because of the Treasury's de facto guarantee of front-end Fannie Mae and Freddie Mac debt, what you're seeing is that anything that moves Treasuries has kind of the same effect on agencies. The only difference is liquidity, and that's where the spread comes from right now."

Freddie Mac sells five-years

Freddie Mac priced $5 billion of new 1.75% five-year Reference Notes on Thursday at a spread of 29.5 basis points over Treasuries.

The notes priced at 99.714 to yield 1.81%. Price talk was at a spread of 29.5 bps over Treasuries.

Barclays Capital Inc., J.P. Morgan Chase and Citigroup Global Markets are the lead managers.

The notes ended the day unchanged at a spread of about 29.5 bps bid, Skinner said.

"It was priced fairly," he said. "Price talk was initially 30 bps; they improved it by 0.5 bps, and it came and it went pretty well."

The deal was oversubscribed, although a number of investors were expecting a shorter offering, Skinner said.

"They kind of surprised the market yesterday when the announced the five-year deal," he said. "People were kind of expecting a front-end one."

The other trader said the supply was a much-needed injection of liquidity into the belly of the curve.

"I think everybody's happy that they came with a five-year," the trader said. "Looked like they had really good, solid demand, tightened the pricing yesterday...I think the fact that five-year spreads didn't really change that much shows how much appetite the market had for this deal."

Busy week ahead

Skinner said the market has been quiet all week and attributed the thin volumes to the Monday holiday for Labor Day.

"It was a strange week," he said. "We came a day late after Labor Day, then we had Rosh Hashana today and people will be off tomorrow, so the market's not at full capacity."

The market's movements over the past several days may not be fully indicative of investors' sentiments at the moment, but things should get back to speed after the weekend.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.