Agency spreads narrow as Freddie Mac reopens five-year notes; Fed to purchase at long end

By Kenneth Lim

Boston, Jan. 28 - Agency spreads tightened slightly on Thursday as a well-received reopening by Freddie Mac and a coming purchase operation by the Federal Reserve Bank of New York gave the market a broad boost.

After weakness the previous two days, bullet spreads were seen slightly tighter by about 1 to 3 basis points across the yield curve on Thursday, with issues that are five years and out doing slightly better.

Agencies had come under pressure since the week before, when Rep. Barney Frank said the House Financial Services Committee, which he chairs, will probably recommend abolishing Fannie Mae and Freddie Mac. Treasuries also rallied, while swap spreads widened. That led spreads to shift outwards by about 3 to 4 bps, an agency trader said.

"We've retraced about half of that move," the trader said. "Part of it is Treasuries trading off. Part of it is the buyback announced today [by the Fed]."

Freddie Mac's 2.875% Reference Notes due February 2015 widened slightly on Thursday after being reopened at a spread of 28.5 bps over Treasuries.

The $1 billion reopening priced through an auction at 100.748022 to yield 2.714%. The bid-to-cover ratio was 3.86 to 1.

Meanwhile, the Fed will buy agency notes due October 2016 to July 2032 on Friday as part of its outright coupon purchase program, according to a press release Thursday.

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