LONDON -- Freddie Mac's second large euro-denominated global-debt issue drew wider international interest in part because of a more upbeat view on the common European currency, bankers and officials at the agency said.
Freddie Mac sold five billion euros ($4.28 billion) of the issue, the second in a yearlong 20 billion euro EuroReference note program.
In its debut issue in September, European investors bought 90% of the five billion euros of notes sold. But in yesterday's offering, 15% of the orders came from the U.S. and another 20% came from Japanese and other Asian investors, according to people familiar with the deal.
Bankers said a significant number of buyers had arranged to exchange payments in euros for dollars. They did that by entering swaps, or complex transactions that make it possible to switch from fixed-rate to floating-rate financing or from one currency to another.
"This is clearly the right maturity, as U.S. investors looking to swap back into dollars will get a substantial pickup," said Daniel Bittner, executive director at Goldman Sachs. "This arbitrage will really help support the deal, even though the large bulk of the bonds got placed into Europe."
Brought via lead managers ABN Amro, Morgan Stanley Dean Witter and Schroder Salomon Smith Barney, the notes yielded 0.32 percentage point more than the January 2006 French government bond, or BTAN, and 0.402 percentage point over a comparable German issue, the OBL 136. The yield margin was at the narrower end of intitial indications.
After trading began, the securities maintained their initial yield spreads, according to traders.
Investors who buy bonds denominated in other currencies must consider the impact of currency movements, and some swap from one currency to another to avert that risk.
But Freddie Mac Treasurer Louise Herrle said buyers of the notes outside of Europe wanted to take positions in euro-denominated securities.
"People could have swapped out the currency risk, but I think you can extrapolate an underlying demand for investors to take euro risk," Ms. Herrle said. "In conversations with investors, we heard about interest to express a view on the euro and that they felt comfortable doing this through the Freddie Mac issue."
The euro has gained about two cents against the dollar so far this week on concerns about slowing U.S. growth, stock-market weakness and the unresolved presidential election.
People in the market said Freddie Mac's offering also benefited from so-called safe-harbor buying, or a perception that its securities are relatively safer than some others. Its five-year maturity also proved more popular than the 10-year maturity sold in September, bankers said.
Freddie Mac, whose mission is to bolster the mortgage-lending market in the U.S., drew comparisons to German issuers of Pfandbrief, or mortgage-backed securities. But Freddie Mac's EuroReference notes have the advantage of being particularly easy to trade, or liquid, some said.
A portfolio manager based in Britain who declined to be named said, "The liquidity on these jumbo Freddies is amazing. With a half-basis point bid-offer spread, the moment we turn a bit bearish on the deal we can get out at very little cost." (A basis point is a hundredth of a percentage point.)
Claus Meyer-Cording, fund manager with DWS Deutsche Gesellschaft fuer
Wertpapier, said Freddie Mac notes rank in the same category as the German
mortgage-backed issues and that he expects the two to trade at closer yields in
the future. "Freddie Mac, sure, the quality is well known," he said.
"But it's all a question of the yield."
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