UPDATE:Freddie Mac Sells 2 Smaller Note Issues To Good Demand
27 March 2009 - 9:18AM
Dow Jones News
Freddie Mac (FRE) on Thursday sold $3 billion of 10-year notes
and $5 billion of two-year notes to persistent investor demand.
This time, however, both deals were smaller in size from the
massive debt offerings that the government-sponsored enterprise has
issued in the past couple of months.
Market participants cautioned that the sizes are no indication
of investor appetite, and it has more to do with Freddie Mac's
preference to keep its issues to manageable size.
"We really wanted to do transactions that were back to our
normal size of $3 billion to $5 billion," said Peter Federico,
treasurer and senior vice president at Freddie Mac.
He added that concerns about saturating the market also prompted
the company to cancel its regularly scheduled bond offering last
week.
"While there was still demand out there, the market was starting
to feel heavy with Treasury supply, the FDIC [Federal Deposit
Insurance Corp.] paper and GSEs [government-sponsored
enterprises]," he said. "We wanted to give the market time to
digest."
The mortgage company's sale on Thursday was ahead of a U.S.
Treasury Department auction of $24 billion in seven-year notes. On
Wednesday, a similar auction of five-year Treasury notes met with
weaker-than-expected demand, sparking some concern that increased
government borrowing was overwhelming demand for these kinds of
securities.
But that wasn't the case with the Freddie issues.
"There's still an appetite for these kinds of deals," said Chris
Aherns, a strategist with UBS.
Market participants said 10-year issues typically tend to be
smaller in size, since the mortgage companies don't need too much
funding for such a long term.
Freddie's issue drew about $6 billion to $7 billion of orders,
but the company chose to cap the deal size at $3 billion, a source
close to the deal said.
The two-year note issue also was well subscribed, market
participants said, which prompted the company to lower its risk
premium to 71 basis points from the initial 72.5 basis points over
comparable Treasury yields.
However, this was smaller than a comparable Fannie Mae (FNM)
deal sold in February, which ballooned to $15 billion in size.
Freddie, which says it will respond to market demand, said it
isn't inclined to do many of those mega-deals anymore.
"My expectation now is that we can find equilibrium consistent
with normal-sized transactions," Federico said.
Currently, risk premiums on existing agency debt securities are
mixed with tighter levels on the short end, and weaker levels on
the long end. Fannie's two-year note traded at 65.5 basis points,
while Freddie's 4.875% note due 2018 was at 85.5 basis points,
according to TradeWeb data.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071;
prabha.natarajan@dowjones.com