Agencies widen as investors cut risk on Fed news; market eyes short-end Freddie Mac deal

By Kenneth Lim

Boston, June 23 - Agency spreads widened slightly on Wednesday as investors continued to reduce their risk exposure following cautious statements by the Federal Reserve.

Bullet spreads closed a tad wider on the day, said Joseph J. Riley, senior managing director of institutional sales and trading at Mesirow Financial.

"Spreads drifted a little wider, mostly right around [Treasury] auction time, but nothing dramatic," he said.

Callable issuance was brisk, although the dominant product remains step-up structures, which are seen as more defensive investments in the current low-rates environment, he added.

The callable business has mostly been driven by existing notes getting called, which places money in the hands of investors who want to plow that cash back into new callables.

There was "good turnover," Riley said, with "a lot of bonds being called."

Trading volumes were strong for a summer day with the World Cup distracting traders in the morning.

Safe haven buying

Investors on Wednesday shifted toward safe-haven instruments on the back of cautious language from the Federal Open Market Committee.

In a statement, the Fed on Wednesday said the domestic economic recovery is still intact but cautioned that "financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad."

The Fed cited the slow pace in housing starts and employment among key reasons for its wariness. Indeed, new home sales in May fell 32.7% as a tax credit program ended.

"Everyone wants to hold U.S. dollar-denominated products," Riley said.

Agency spreads held up relatively well despite the flight to Treasuries, because short-term agency debt enjoys extremely strong support from the government.

"I think a lot of the large international buyers, the indirect bidders, are of course going to take down tremendous amounts of Treasuries, but those accounts also take down a lot of agency debt," Riley said. "For the most practical purposes, agencies are as good as U.S. government debt right now. The spreads should be tight, and they are."

Freddie Mac ahead

The market expects Freddie Mac to announce an offering of Reference Notes in the short end of the curve on Thursday, Riley added.

"I expect a two- or three-year benchmark size," he said. "I haven't heard spread talk yet, but I expect we'll hear about it tomorrow."

Freddie Mac's calendar slot will be the last one of the month, and the last one for two weeks, before the primary pipeline opens again with Fannie Mae on July 7.

Meanwhile, Private Export Funding Corp. sold $100 million of its 4.3% notes due 2021 in a reopening. The notes priced at a spread of 105 basis points over Treasuries.

Bank of America Merrill Lynch was the bookrunner.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.