Agencies tighten following central banks' coordinated action; Freddie Mac sells two-years

By Kenneth Lim

Boston, Sept. 15 - Agency spreads narrowed slightly Thursday as a move by central banks to support liquidity in the credit markets encouraged investors to put risk back in their portfolios.

Bullet spreads closed the day flat to tighter by about 2 basis points across the yield curve.

"Spreads tightened generally on the down move in rates, and swap spreads tightened as well based on some of those European issues settling for the time being," an agency trader said.

Secondary trading volumes remained muted as persistent uncertainty about the debt crisis in Europe and the coming Federal Open Market Committee meeting kept money on the sidelines.

"Volumes were mediocre, although there were a lot of new callable issues because of all the redemptions we've been seeing," the trader said.

Freddie Mac sells two-years

Freddie Mac drew solid interest for its offering of new two-year Reference Notes, pricing $5 billion of the 0.375% paper on Thursday at a spread of 20 bps over Treasuries.

The notes were sold at 99.937 to yield 0.405%.

Price talk was at a spread of 20 bps over Treasuries. The notes tightened over the day, closing out at spreads of 19 bps bid, 18.5 bps offered.

J.P. Morgan Securities LLC, Deutsche Bank Securities, Inc. and BNP Paribas Securities Corp. were the lead managers.

"They seem to be trading well," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co.

The notes found strong demand partly because investors are hungry for yield at the front end of the curve, where two-year Treasury yields are under 0.20%, Hurley said.

Investors are also comfortable with buying at the front end because the Fed has said that it plans to keep short-term interest rates at the current low range until mid-2013.

"There's a lot of demand for short paper because there's very little risk in it," Hurley said. "Agencies pick up more than Treasuries, and there's little downside risk because Fed policy is on hold."

Central banks take action

The European Central Bank, U.S. Fed, the Bank of England, the Bank of Japan and the Swiss National Bank will coordinate on three fixed-rate operations between October and December to offer three-month U.S.-dollar loans to commercial banks.

The move is intended to prevent a liquidity crisis as Europe's debt problems mount and should provide the commercial banks with as much funding as they need to meet year-end needs.

The strategy seemed to work, as investors shifted decisively into stocks and other risk assets on Thursday on higher optimism that a banking crisis could be averted.

"The risk on trade's back on," the trader said.

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