Agencies mixed as concerns about Europe ease; Freddie Mac sells $4 billion two-year notes

By Kenneth Lim

Boston, Dec. 1 - Agency spreads ended mixed on Wednesday as safe-haven bids dried up on an abatement of concern about the European debt crisis and the U.S. economy.

Freddie Mac saw good interest in its $4 billion offering of new two-year Reference Notes, but the deal widened after pricing in line with the broader market.

Bullet spreads closed slightly tighter at the front end of the yield curve, but ended wider versus Treasuries at longer maturities.

"On average I'd say we're about unchanged versus Treasuries," an agency trader said. "But that means it was kind of a bad day for agencies, too, because Treasuries were getting hammered today."

Callables, however, had a decent day amid the back-up in rates.

"The coupons look more attractive when rates back up, the trader said.

Agencies lag swaps

The agency market fell behind swaps for the first time this week, as swaps were the main beneficiary of higher confidence in the European debt situation.

The market backed off recent flight-to-quality trades on Wednesday amid speculation that the European Union plans to announce more aid for members, such as Ireland and Portugal, which are under pressure from high amounts of debt.

The chief of the European Financial Stability Fund said the emergency body could raise more debt in January, while Reuters reported that the United States might be willing to commit more money to the fund through the International Monetary Fund.

"Obviously any optimism about Europe is going to benefit swaps the most," the trader said. "Agencies definitely underperformed swaps. Not a great day for agencies."

But the underperformance was not a major concern after agencies outperformed swaps for the past two days, the trader added.

"It's kind of even now," the trader said.

Freddie Mac sells two-years

Freddie Mac sold $4 billion of new 0.625% two-year Reference Notes on Wednesday at a spread of 17 basis points over Treasuries.

The notes were sold at 99.866 to yield 0.69%. Price talk was at a spread of 17.5 bps over Treasuries.

The new paper ended the day at a spread of about 17.4 bps over Treasuries.

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

The deal received good demand, but the day's sell-off led spreads to widen, the trader said.

"Other issues in that part of the curve are also out about half a basis point, so it's kind of in line with the rest of the market," the trader said. "Given that it was only about a half basis point concession, it's not too bad."

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said price talk was "reasonably tight."

"It's a rough day to do it, though, to be honest - pricing a $4 billion deal in the midst of an aggressive selloff," LeBas said.

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