Agencies lag Treasuries, outperform swaps on European fears; Freddie Mac plans two deals

By Kenneth Lim

Boston, Nov. 30 - Agency spreads widened versus Treasuries but improved versus swaps on Tuesday amid ongoing concerns about Europe's debt crisis.

Freddie Mac sold $1 billion of three-year Reference Notes in a reopening, while also announcing a benchmark-sized offering to price Wednesday.

Bullet spreads widened by about 2 basis points against Treasuries in the two-year sector, while five-year spreads eased out by half a basis point. Spreads in the 10-year sector closed unchanged versus Treasuries.

But the market did better against swaps, which widened out on worries about the financial health of southern European countries. Two-year agencies outperformed swaps by about 0.5 to 1 bp, an agency trader said.

"Obviously the continuing coverage of what's going on in Europe widened swap spreads out and agencies followed suit, but agencies actually did better than swaps," the trader said.

Trading volumes were active as investors sought to take advantage of recent widening. There were some month-end extension trades, but not as much as in previous months, the trader said.

"It was busy," the trader said. "We did some trading, had a buyer come in for [Federal Deposit Insurance Corp.-backed] paper...I think accounts probably have seen a little bit of extension as the market has sold off, and you're not getting the extension rollover reinvestment that we'd seen in previous weeks in callables."

Callables draw interest

Callable activity has been brisk on the recent back-up in rates and the cheapening of swaps.

"The backup in the market has offered the opportunity to put some nice coupons on paper," the trader said. "The rally in Treasuries is being offset by widening in swaps, so net-net it's giving accounts attractive coupons."

Fannie Mae and Freddie Mac have been a little more aggressive in their funding levels, and Federal Home Loan Banks and Federal Farm Credit Banks have been active callable issuers in the past few sessions, the trader said.

"It had gotten kind of quiet over the past two weeks or so due to the Thanksgiving holiday, but also because the sharp selloff a couple of weeks ago caught the market a little long, so the Street had to work out a bit of that," the trader said. "Now the month-end is over there's a little more room."

Freddie Mac plans two deals

Freddie Mac announced two offerings of Reference Notes on Tuesday.

The agency priced a $1 billion reopening of 0.875% three-year Reference Notes on Tuesday at a spread of 16.3 bps over Treasuries, according to a press release.

The notes were sold at 100.016468 through an auction to yield 0.869%.

There is now $4 billion outstanding under the debt series.

The reopened notes widened over the day to go out at spreads of about 18 bps bid, 17 bps offered.

Freddie Mac also plans to price new two-year Reference Notes on Wednesday, talked at a spread of 17.5 bps over Treasuries.

The size of the offering has not been set, but it is expected to be at least $3 billion.

Barclays Capital Inc., Credit Suisse and Morgan Stanley are the lead managers.

Price talk represented a concession of about 1.5 bps to surrounding issues, and the order book hovered around $4 billion at the close, the trader said.

"Recent deals came with a 0.375% coupon, so given price talk now you're looking at almost a 0.625% coupon, so I think that should attract some accounts," the trader said. "It's going to be well received."

The trader was not surprised at Freddie Mac's decision to launch two deals, adding that the size of the new offering will probably not be especially large.

"Compared to some of the recent front-end deals, I don't think it's necessarily an overreach," the trader said. "Coming at the front end was kind of a have-to-do trade for them, the alternative being doing nothing."

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