April 1, 2019
For fear of sounding like a broken record, Treasury yields continued to grind lower last week. The yield curve ended the week with the yield curve inverted between the 3-month Bill and the 10-year Note. The 2s-to-10s slope was mostly unchanged week-over-week at +14 basis points. The 5-year Treasury yield declined by the least versus other sections of the yield curve, as highlighted in the table below. On Friday the latest price report was released showing that core PCE, the Fed’s preferred inflation gauge, missed expectations at just 1.8% year-over-year. The lack of price pressure backs up the Fed’s recent dovishness and affirms the fact that the FOMC need not tighten further at this point to keep inflation from running out of control. Agency bullets moved in line with Treasuries on the week. Bullet yields for maturities of 2 and 3 years fell by 4-6 basis points to 2.30% and 2.27%, respectively.
Agency bullets basically moved in line with government debt, while callables continued to widen out. Currently 3- and 5-year agency bullet spreads are at 6 and 9 basis points, respectively. If investors can assume the added duration, the cheapest part of the curve for agency bullets appears to be near the 7-year mark—not only have spreads held in at 24 basis points, but the Treasury curve begins to steepen out past 5 years. Callables resumed their widening trend as purchasers continue to demand increased compensation to take on the added call risk, which is likely being driven by, at least in part, the implications of an inverted yield curve. The least structured 3-year callables yield ~2.65%, and less-structured 5-year callables yield ~2.85%. A more highly structured 5-year callable with a 1-year Bermudan call yields somewhere in the ~2.72% neighborhood.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Last week’s call activity declined to $1.2 billion, the bulk of which was 2018 production. The major agency issuers have called $19.8 billion in securities since the beginning of March. Total issuance last week was high at $8.5 billion.
Last Tuesday the Federal Home Loan Bank passed on its Global issuance slot, as it has 4 out of 5 times so far this year. Tomorrow, April 2nd, is the upcoming Reference note issuance slot for Freddie Mac. Next Wednesday, April 10th, is the next issuance date for Fannie Mae, who has not had a major issuance date since the beginning of March.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP