UPDATE:Freddie Mac Sells 2 Smaller Note Issues To Good Demand

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;

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