Freddie sees strong demand in key $3 bln bill sale

NEW YORK (Reuters) - Freddie Mac's (FRE.N) $3 billion bill sale on Monday drew stronger demand than a similar sale last week in a deal seen as the first test of the housing finance company's borrowing ability after sweeping steps by the United States to shore up confidence in the company.

The U.S. government on Sunday announced a plan to help calm fears about mortgage agencies and Freddie Mac and larger rival Fannie Mae (FNM.N).

The two companies are government-sponsored enterprises but shareholder owned, and concerns about their capitalization hammered their shares last week to the lowest levels in 17 years.

"I don't think this issue with the GSEs has been put to rest, but the auction went fine and it did what it was supposed to," said Andrew Harding, chief investment officer of fixed-income at Allegiant Asset Management in Cleveland, which oversees $20 billion in fixed-income securities.

Freddie sells bills every week as part of its routine financing of its operations.

Freddie Mac sold $2 billion of three-month bills at a 2.309 percent rate, compared with a 2.323 percent rate for a same size and maturity deal sold on July 7.

Freddie Mac also sold $1 billion of six-month bills at a 2.496 percent rate, compared with 2.489 for a $2 billion, six-month deal sold a week earlier.

Demand for both deals was higher than a week earlier, based on higher bid-to-cover ratios, which reflects the amount of bids to the amount of bills offered.

The three month had a bid-to-cover of 4.16 compared with 2.98 on July 7, while the six-month bills bid-to-cover ratio was 3.73 compared with 2.74 a week earlier.

The results "should tell a strong story," said Debbie Cunningham, chief investment officer for taxable money markets at Pittsburgh-based Federated Investors Inc., which manages more than $300 billion.

The sale was already set to do well given a relatively small size and supportive comments from officials last week that made money markets feel comfortable that there was implicit government backing, she said.

The weekend announcement was "direct and very specific confirmation of what had been more indirect and vague support" last week, she added.

The new three-month bills were priced at 99.416 for a money market yield of 2.323 percent. The new six-month issue was priced at 98.745 for a 2.528 percent money market yield.

As a benchmark, three-month London interbank offered rate was at 2.79 percent on Monday, little changed over the past week.

Short-term bills and notes of Fannie Mae and Freddie Mac have traded well-below that rate -- around 2.3 percent for three-month debt and 2.52 percent for six-month debt before the auctions on Monday -- partly due to high demand from money market funds, analysts said.

(Additional reporting by Caryn Trokie; Editing by Tom Hals)