Agency spreads expand on profit taking; shorter Reference Notes expected from Freddie Mac

By Kenneth Lim

Boston, Aug. 3 - Agency spreads eased on Monday as profit takers reaped the fruits of the previous week's tightening, market sources said.

Meanwhile, Freddie Mac was expected to come to the market with an offering of Reference Notes at the short end of the yield curve.

"Spreads are slightly wider on the day," one agency trader said. "Primarily because they were much tighter last week. They just gave up some of the big gains from last week."

Bullet agency spreads tightened sharply over the past week, and accounts are taking advantage of the opportunity to take chalk up some quick gains, another trader said.

"It's a new month, so the funds can take profits now and look for better value elsewhere or wait until the yields are better," the trader said. "Some people are switching farther out on the curve because the front end is so tight now."

Freddie Mac

Freddie Mac has an Reference Notes announcement scheduled for Tuesday.

The agency did not issue any new series in June, choosing only to reopen existing notes in the three-year territory.

Tuesday's deal is also expected to be at the short end of the curve, the first agency trader said.

"That's due to the fact that Libor is so low now valuations are the most attractive for them at the short end," the trader said.

More spread correction possible

The first trader said more widening could be possible this week.

"You could see some more profit taking especially if investors see better yields elsewhere," the trader said. "Freddie Mac is also issuing tomorrow, that could add to supply."

But the weekly Federal Reserve purchases could relieve some of the pressure.

"Some investors are buying on hopes of selling to the Fed later, taking profit from the Fed," the trader said. "That's definitely helping a bit, but at the same time it's hard right now to know what the market's really thinking without the Fed always there to provide support."

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