April 13, 2020
Some cautious optimism appeared to creep into the bond and stock markets last week that the U.S. may be nearing the peak in coronavirus cases stateside. The Federal Reserve and the Department of the Treasury have been extremely responsive in trying to limit the effects of shutting down the bulk of the economy, as the Fed has lowered the overnight target rate basically to 0.00% and restarted its quantitative easing program, and the Treasury announced trillions in emergency stimulus packages and lending programs mostly aimed at lower income workers and small business owners. The front end of the yield curve largely held steady last week while the 10-year Treasury note increased by 12 basis points. There are a handful of economic releases scheduled for later this week that will surely be dire, but the market will likely be more interested on whether the data shows improvement on the coronavirus front—the sooner the economy reaches the peak in cases and begins to roll down the other side of the “curve,” the sooner the economy can be reopened and life can return to something more resembling normal.
Agency bullet spreads were mostly unchanged last week. Callables were little changed as well but for some 2- and 3-year paper that tightened in by a couple of basis points. Both agency bullets and callables remain extremely wide from a spread basis, although investors must stomach absolute yields being near multiyear lows. The most activity by Vining Sparks customers appeared to be in callable purchases in the 4.5- to 7-year part of the curve. For portfolio managers looking to hit 1.00% yields or better with bullets, maturities must extend out to roughly 6.5 years. Right now, it is much easier to top those yields across the entire agency curve with callables.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance was flat at $7.9 billion while call volume nearly doubled to $8.1 billion, despite the shortened week. Callable owners can continue to expect nearly all call options to be exercised at the next opportunity given the current level of market rates, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its Benchmark issuance slot, as did Freddie Mac on its Reference note announcement date. Tomorrow, April 14th, the Federal Home Loan Bank has an issuance slot to announce Global notes.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP