Agencies widen ahead of Freddie Mac's two-year offering; price talk viewed as 'aggressive'

By Kenneth Lim

Boston, Feb. 1 - Agency spreads widened slightly on Tuesday as investors sold off on the front end of the curve to set up for coming supply from Freddie Mac.

Bullet spreads closed about 1 basis point further out versus Treasuries across the yield curve, with the two-year sector underperforming slightly.

"Spreads in twos to pretty much across the curve were a little bit wider today," an agency trader said.

Callable volumes remained muted with issuance mostly coming from reopenings of recently priced deals.

"Almost all of the deals today were just upsizes of deals from earlier last week when rates were at higher levels," the trader said. "Guys who missed the move up got another chance to get in, but no really large global deals."

Freddie Mac plans deal

Freddie Mac plans to price new two-year Reference Notes on Wednesday, talked at a spread of 21 bps over Treasuries, market sources said.

The size of the deal has not been set, but it will be at least $3 billion, the agency said in a press release.

UBS Investment Bank, Deutsche Bank Securities Inc. and Goldman Sachs & Co. are the lead managers.

The offering was coming at just a slight concession but should still do well, the trader said.

"It's not much of a concession, but it's still 2 bps over the curve, so I think it'll go pretty well," the trader said.

The offering will probably end up between $3 billion to $4 billion, with the aggressive pricing potentially limiting the prospects of a big upsize.

"Books have been building strongly, so they might grow it to $3.5 billion or $4 billion," the trader said. "But it's coming at Libor minus 9 bps, so it's a little rich, so they might just leave it at $3 billion on this one because they have an option to do something again on the 24th."

Freddie Mac's next issuance calendar announcement is on Feb. 24.

Supply weighs on spreads

Investors had mostly been expecting a front-end offering by Freddie Mac, but the announcement of the deal still put pressure on the two-year sector on Tuesday, the trader added.

"People definitely seem to be making some allowance for the Freddie Mac supply tomorrow," he said.

Agencies lagged Treasuries as well as swaps on Tuesday, which was a disappointment because swaps came in versus Treasuries, the trader said. Agency spreads usually have a closer correlation to swaps than to Treasuries.

"It was a bit of a surprise because swaps were in on the day," the trader said. "So I was surprised that agencies were that weak."

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