The long end of the curve gained 2bp against Treasuries yesterday, leaving the on-the-run 30 year at flat to 2bp over Libor levels, which is still very cheap, but slightly improved over the last week. The two year and shorter part of the curve, which had been suffering on Monday, continued to be weak.
Freddie Mac priced its three year Reference Note on Friday at 77bp over the 4% April 2003 Treasury Note. That left the deal yielding 5.03%. The bid-to-cover ratio, at 2.77 times, was slightly lower than the 3.11 achieved in the March 8 auction, which one analyst attributed to the lack of league table credit for this issue.
The pricing reflected the general weakness in the fixed income market on Friday. Treasury yields had shot out on the back of retail data and the PPI report on Friday morning. These figures, and the surprise ECB cut, were seen as easing the pressure on the Fed to cut interest rates further.
A rally yesterday morning left the yield on the two year Treasury Note about 7.5bp lower. Dealers selling off the Freddie Mac notes yesterday said the yield on the agency paper had also fallen to slightly inside 5%.
Given the likelihood of the Fed easing monetary policy today, and the possibility of rates getting as low as 4% towards the end of the quarter, analysts saw excellent value in the deal. By 2pm yesterday, New York time, the bonds had come in to 75.5bp-75bp over Treasuries.
That part of the curve offers promising roll-down. On a spread to Treasury basis, at pricing there was a 14bp pick-up between the 6.5% Fannie Mae deal due on August 15, 2004, and the $12.67bn Fannie Mae deal due on February 13, 2004. Although the agency bellwether bullet curve remains cheap to Libor, the steepness of the Libor curve means that there is value to be found in roll-down against swaps as well.
The political backdrop has again been prominent as congressman Richard Baker continues his efforts to revise supervision of the agencies.
Armando Falcon, director general of Freddie Mac and Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), told the annual bank structure conference of the Federal Reserve Bank of Chicago that congressman Baker's proposals "could disrupt current safety and soundness regulation". "Those who cannot remember the past are condemned to repeat," Falcon said, referring to his experience on the staff of the House Banking Committee during the savings and loan crisis.
One of Baker's chief proposals is the dissolution of OFHEO, and the transferral of responsibility for oversight of the agencies from the Department of Housing and Urban Development (HUD), of which OFHEO is an autonomous arm, to the Federal Open Markets Committee (FOMC).