Agencies narrow; Egypt protests spark flight to front end; Freddie Mac sells two-years

By Kenneth Lim

Boston, Feb. 2 - Agency spreads narrowed slightly on Wednesday as continuing unrest in Egypt pushed investors toward safer short-term assets.

Freddie Mac sold $4 billion of new two-year Reference Notes to solid demand, giving a much needed surge in activity for the market.

Bullet spreads came in by about half a basis point across the board on Wednesday, an agency trader said.

"We're still off to a slower start than the way we finished 2010, but agencies as a whole are doing very well," the trader said.

Callable issuance picked up in the morning, but then faded with the day as absolute rate levels rose.

"The market pulled back a little bit in the afternoon," the trader said. "[Federal Farm Credit Banks] auctioned off five deals today, [Federal Home Loan Banks] offered two, but with rates rising the market kind of pulled back."

Freddie Mac sells two-years

Freddie Mac saw strong demand for its $4 billion offering of new 0.75% two-year Reference Notes, the trader said.

The notes were sold at 99.758 to yield 0.864%. They priced at a spread of 21.5 bps over Treasuries.

Price talk was at a spread of 21 bps over Treasuries.

UBS Investment Bank, Deutsche Bank Securities Inc. and Goldman Sachs & Co. were the lead managers.

"The new deal went very, very well," the trader said. "Anything and everything in the front end, especially something with size like this, is doing well."

The deal was priced aggressively, but the fact that the issuer could sell $4 billion of debt at essentially the same level as price talk reflected the market's huge appetite for front-end paper, the trader said.

"It just goes to show you how much demand there was," the trader said. "I don't think the deal would have been able to price where it went if demand wasn't there."

Volumes still soft

Wednesday's market got a slight boost from investors who were concerned about ongoing unrest in Egypt, the trader said.

"With more uncertainty in the Middle East, people with cash who need to put it to work are putting it to work in the front end," the trader said.

But volumes were "definitely off," the trader added, because investors are still looking for some clarity on rates.

"People are looking for market direction right now, and there are so many overlaying layers to the market right now," the trader said. "The theme is safe. People want short bullets because they can get out of it and there's no callable aspect to it."

Investors could start to set up for Friday's employment report on Thursday, the trader said.

"I think tomorrow's going to be relatively quiet after the midmorning with people setting up for jobless claims and non-farm payrolls," the trader said.

Looking a little further, the market is also getting a little bit of nervousness ahead of the White House's expected announcement of a plan for the future of Fannie Mae and Freddie Mac. The announcement is expected by mid-February.

Republicans in the U.S. House of Representatives have also scheduled a meeting on Feb. 9 to discuss the housing agencies.

"We're starting to see a little bit more chatter about Congress having to resolve Fannie Mae and Freddie Mac...so there's a little headline risk," the trader said.

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