April 2, 2018
The Agency yield curve continued to flatten last week as investors digested a slew of data releases, with most of the movement occurring in longer term finals. Two-year Agency yields moved higher by 1 bp to 2.35%, 5-year Agencies declined by 3 bps to 2.68%, and yields on 10-year Agencies decreased by 7 bps to 3.04%.
For the second consecutive week, yield spreads for Agency bullets compared to Treasuries were unchanged, while spreads on Agency callables widened, depending on the structure and call tenor. Spreads widened 2 to 3 bps for 5- and 15-year finals, respectively. Structures with 2- and 10-year finals saw a widening of between 5 and 6 bps. As seen below, Agency callables with 5- and 10-year finals remain appealing from a relative value perspective as current spreads compare favorably to their 12-month averages.
For investors that can handle the optionality, callable structures with 10-year finals continue to compare favorably to bullets because of the enhanced relative value on a yield spread basis (see graph below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
The highlight of the agency coupon calendar in the upcoming week will be Freddie Mac’s announcement tomorrow of any plans to sell reference notes.
Notable agency activity last week included:
Ricky Brillard, CPA
Vining Sparks, IBG