Greece, PMI news encourage more risk taking; Freddie Mac sells $5 billion of three-years

By Kenneth Lim

Boston, June 30 - Agency spreads tightened further on Thursday to end the second quarter of the year as investors continued to move out on the risk curve.

Freddie Mac benefited from the positive market, drawing good interest for its offering of three-year Reference Notes.

Bullet spreads tightened by about 1 basis point to 2 bps across the yield curve, with the longer end of the curve outperforming slightly.

"We're going out pretty strong for the quarter," a trader said. "Swaps were out. Agencies were in line to slightly tighter versus swaps. [There was] very good buying."

The callable market also saw good interest on the back-up in yield levels.

"We had a lot of redemptions earlier this month, so there's kind of a rush to reinvest now that yields are back up," the trader said. "A lot of people didn't want to buy a week ago when coupons were low, but now the coupons are looking a lot more acceptable."

Yields climb again

Yields continued to rise on Thursday as concerns about Greece abated and positive purchasing data raised hopes that the U.S. economy could be headed out of a soft patch.

In a continuation of Wednesday's trade, investors on Thursday remained optimistic in the short term about debt-laden Greece managing to avert a default following the lawmakers' approval of new austerity measures that allowed the country to receive further monetary aid.

The flight from quality also got a boost from Institute of Supply Management - Chicago's Purchasing Managers' Index, which showed a surprising jump in business activity. The index rose to 61.1 from 56.6, beating consensus estimates of a drop to 53.

"The economy's the second part of the equation," the trader said. "We already had Greece news being supportive of higher yields, but the U.S. economy was keeping yields from going higher. Then we had the PMI and it was much better than anyone expected, and suddenly the yield ceiling was raised and the Treasury sell-off got a second wind."

The trader discounted the impact of the end of the Federal Reserve's $600 billion quantitative easing program of buying Treasuries on the open market. The program ended Thursday.

"Whatever people think about the end of QE2, they've already priced that into the market," the trader said. "I personally think it's actually going to keep yields low. In fact, it might widen spreads, although I don't think agency spreads will be affected very much."

Freddie Mac sells three-years

Freddie Mac sold $5 billion of new 1% three-year Reference Notes on Thursday at a spread of 29 bps over Treasuries.

The notes tightened by about 1 bp to go out at about 28 bps over Treasuries.

The notes were sold at 99.868 to yield 1.043%. Price talk was at a spread of 29 bps.

Barclays Capital Inc., Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC are the lead managers of the offering.

"It was a very well bought deal," the trader said. "I heard the order book was very strong, pretty strong overseas interest. Obviously there was enough interest for them to sell $5 billion."

The deal got a bit of a boost from quarter-end trading, as accounts hoped to get some last-minute discounted paper before the end of the month.

The size of the offering suggests that Freddie Mac will skip its next issuance slot on July 6, the trader added.

"They've probably covered their funding needs with this one," the trader said.

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