Agencies end week flat; low yields, sizable needs could bring Freddie Mac back to market

By Kenneth Lim

Boston, May 27 - Agency spreads closed flat on Friday as the market shut down early and looked toward possible supply after a long weekend.

Bullet spreads ended the day unchanged after creeping wider for most of the past week.

"Very, very quiet day in front of the long weekend here," an agency trader said. "Besides, I think the Treasury market is also closed already."

The callable market also saw thin trading as the bond markets closed early. Monday is also a holiday for Memorial Day. But most investors seemed to have anticipated the slowdown and did most of their trading in the days before.

"Actually today was pretty quiet, but yesterday we saw pretty strong callable buying, mostly domestic accounts, in conjunction with the market rally," the trader said.

Yields stop falling

The agency market also found some slight relief as Treasuries finally stopped climbing on Friday to ease off of the year's lowest yield levels.

Yields were reluctant to move even lower on Friday after hitting the technically significant 3.06% level in 10-years on Thursday and gave up some ground ahead of the weekend.

But weak economic data, which have fueled the Treasuries' rally over the past month, continued to hit the tape on Friday.

Consumer spending rose a slower 0.4% in April, disappointing Street economists. Real spending, which is adjusted for inflation, was up by just 0.1%.

Pending home sales also fell 11.6% in April, according to data by the National Association of Realtors.

"The economy still remains questionable and euro zone concerns are still high," said Action Economics managing director of global fixed income analysis Kim Rupert.

Freddie Mac ahead

The sharp drop in yields over the past week could entice Freddie Mac to come to the market with a new deal on Tuesday, just two weeks after the agency completed a $1 billion reopening of five-year notes, the trader said.

"I think they'll choose to do a deal," the trader said. "The funding is pretty appealing for them, and they probably need to get some stuff done because their needs are pretty high too."

Freddie Mac has recently redeemed a large amount of callable debt, which has opened up a hole in its funding levels, the trader said. The agency will still issue new callables in the meantime, but a large benchmark-sized bullet offering when funding is cheap would also be a convenient way to raise capital.

"The easiest way to get off their large funding needs is to do one $3 billion bullet deal rather than 20 small callable deals," the trader said.

A two- or three-year deal is the most likely if Freddie Mac announces a deal, the trader said.

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