Agency Update

April 20, 2020

In light of the historically-weak economic data releases last week, which should prove to be the “new normal” in the weeks and months to come, Treasury yields fell and the curve flattened.  Some positive news hit the wire late in the week that an antiviral drug was found to be effective at treating COVID-19 patients in a preclinical trial, although the news should be considered anecdotal until further testing can be completed.  Regardless, stocks and bond yields rose on the news on Friday.  Week-over-week, the 2-year note fell the least by only 2 basis points, while the 10-year fell by 8 basis points, with intermediate term notes somewhere in between.  The bond market will continue to look for a slowdown in new coronavirus cases, increasing the possibility that the broader economy can reopen soon, but in the meantime be prepared for the drastic economic data to continue while many businesses remain shuttered and over 20 million Americans suddenly find themselves unemployed.

Agency bullets mostly moved in line with Treasurys last week.  Callables widened on the week for maturities of 5 years and longer, while shorter term callables tightened in.  Vining Sparks customers continue to stay active in the agency market, particularly in callables, as spreads on callable products remain at levels not seen in nearly a decade.  The most attractive part of the curve, either in bullets or callables, appears to be around the 6- to 8-year sector.  While that may seem longer than some investors would be comfortable with, most banks show the asset sensitivity that would make adding longer-term securities possible without exacerbating their interest rate risk profiles.  Of course, callables do not offer any falling rate protection, but given where rates are today, there is only so much further they can fall.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance declined marginally to $6.7 billion while call volume increased again to $10.2 billion.  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 the Federal Home Loan Bank announced a $1.5 billion 5-year Global note that priced at +26, but it is trading several basis points tighter today.  Freddie Mac announced a new $3 billion Reference note that priced at +22, but it is trading in the high teens today.  This is likely evidence that Fed intervention in the Treasury market is tightening spreads, at least in the larger issue, more liquid agencies.  This Wednesday Fannie Mae has an announcement date to issue Benchmark notes.  There are no major issuance dates scheduled for next week.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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