Freddie Mac lifts subordinated agencies with tender offer; Fed buys $3.9 billion

By Kenneth Lim

Boston, July 10 - The agency market got a boost Friday after Freddie Mac offered to buy back all its SUBS at a significant premium to market levels, while the Federal Reserve continued to buy back agency securities.

"The biggest news today is Freddie Mac announced over $4 billion in sub debt tenders...you're talking about, in their tender for their bonds, 50 to 90 basis points over the market," said trader Craig Ziegler of Broadpoint.

Freddie Mac on Friday offered to buy all its $4.39 billion of outstanding SUBS subordinated securities for cash in the week of July 13. The agency is offering to buy its $1.09 billion of 5.875% Freddie SUBS due March 21, 2011 at a spread of 100 basis points over Treasuries, $1.25 billion of 5.75% Freddie SUBS due June 27, 2016 at a spread of 125 bps and $2.05 billion of 5% Freddie SUBS due Dec. 14, 2018 at a spread of 125 bps.

Goldman, Sachs & Co. is the lead dealer manager with Banc of America Securities LLC and Citigroup Global Markets Inc.

Surprise move

The announcement was an unexpected lift for the subordinated segment of the market, Ziegler said.

"It was a complete surprise," he said.

The size of the tender offer premium improved confidence in agencies and even raised the possibility that Fannie Mae, which has four outstanding subordinated issues, could follow suit.

But one agency strategist thought that the impact of the tender offer was likely localized to the subordinated market and not necessarily positive, especially for investors who were short on the subordinated notes.

"This is Freddie's third tender in the last five weeks," the strategist said. "Fannie hasn't followed them on any of the other tenders, so I don't know if we'll see anything. All the tender offers have been a surprise...but so far they've been special securities. We haven't seen them just go and buy regular debt yet."

"It's a $4 billion market," the strategist added. "It's quite small."

Fed continues buyback

The Federal Reserve Bank of New York continued to buy back agency securities Friday.

The Fed bought $3.873 billion of agency notes due 2010 and 2011 through its open market program, according to data from the Fed. A total of $7.043 billion of notes were submitted.

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