Agencies tighten on optimism over Greece; Freddie Mac reopens five-years, offers two-years

By Kenneth Lim

Boston, Sept. 14 - Agency spreads narrowed slightly Wednesday as market fears of a Greek default subsided following reassurances by European leaders.

Freddie Mac seemed to take advantage of the currently low yields to get some funding needs out of the way, reopening a five-year issue and launching a new two-year series.

Bullet spreads came in by about half a basis point against Treasuries on the day at the front end of the yield curve, while staying mostly unchanged in longer maturities.

"For the most part spreads are going to close the day just a little bit firmer," an agency trader said.

The callable market remained active, although the larger institutional type deals were quieter. Investors appeared to be looking more toward step-up and structured deals, the trader said.

"It's a continuation of the theme of accounts moving out in maturity," the trader said. "Rather than two-year callables, they're buying three-, five-year callables; and instead of three-, five-year callables, they're buying three-, five-year steps."

Freddie Mac hits twos, fives

Freddie Mac reopened its 2% five-year Reference Notes on Wednesday, selling $1 billion of the notes at a yield of 1.162%.

The notes were priced at 104.015054 through an auction. The spread at pricing was 28.6 basis points over Treasuries.

There are now $5 billion of notes outstanding under the note series.

At pricing, the deal was about half a basis point tighter than the market, indicating strong demand. The reopened notes ended the day close to where they priced.

"It was about 29.5 bps bid, 29 bps offered in the market, now it's about 28.5 bps bid, 28 bps offered," the trader said. "It kind of tightened up in line with the deal."

Freddie Mac also said it would sell a benchmark-sized offering of new two-year Reference Notes on Thursday.

Price talk on the shorter deal was at a spread of 20 bps over Treasuries, which was also in line with surrounding issues, the trader said.

J.P. Morgan Chase, Deutsche Bank Securities, Inc. and BNP Paribas Securities Corp. are the lead managers of the two-year offering.

"The deal is seeing extremely good demand," the trader said. "The book is over $5 billion heading into the evening."

The trader noted "seeing strong interest from central banks and large money managers."

Yields inch higher

Yields rose modestly Wednesday as the investors who were worried about a Greek default found some comfort from comments by European leaders.

The market initially saw some flight-to-quality buying early in the day after Moody's Investors Service shaved one grade off the credit ratings of French banks Societe Generale SA and Credit Agricole SA, citing their exposure to Greece.

The two banks and BNP Paribas SA were put on negative outlook for the same reason.

But investors reversed course in the afternoon on reassurances by the heads of Germany and France, who discussed the crisis with the Greek prime minister Wednesday.

"In light of the rumors of recent days, it was stressed by all that Greece is an indivisible part of the euro zone," the Greek government said in a statement after the meeting.

But overall investor response to the day's news was muted, perhaps reflecting a market that was already in full anticipation mode, said Jason Rogan, director of U.S. Treasury trading at Guggenheim Partners.

"The market's kind of taking it all in stride," Rogan said.

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