April 4, 2022
Treasury yields continued to push higher on the front end of the curve last week and the yield curve between the 2- and 10-year inverted for the first time since 2019. The 2-year yield again surged by 19 basis points to 2.46% and is now up over 170 basis points to start the year. The 5-year yield increased by only a basis point but is still up 130 basis points since year-end, while the 10-year yield declined by 9 basis points. The unusual dynamics in term structure mostly stem from the Fed and the expected rate hikes needed to tamp down inflation, which will likely slow growth, increasing the odds that monetary loosening may be needed after such swift tightening. The jobs report released on Friday showed another strong month in payrolls growth and unemployment fell to 3.6%. With inflation at 40-year highs, such a tight labor force likely gives the Fed the green light to hike 50 basis points in May as is currently priced into the market. Agency bullets widened modestly last week while callables widened much more meaningfully—more below.
The economic calendar this week is particularly light after such a busy week last week. The ISM services index will be released tomorrow (Tuesday), and the March FOMC meeting minutes come out on Wednesday. Given such heavy Fed communication in recent weeks, there will likely be few surprises in the minutes. Additionally, two Fed members are scheduled to speak on Thursday. Market participants will likely spend another week contemplating the inverted yield curve and debating whether the Fed can achieve a “soft landing,”, slowing inflation without tipping the economy into recession.
It was another busy one on the agency desk last week. Agency bullets widened on the week for intermediate maturities, with 3- and 5- year bullets each widening by a basis point. However, with bullets out to 5-year terms still trading at low single digit spreads, most of the activity continued to be in Treasurys. Callables continued to widen out last week, with many 3- and 5-year structures widening by 5 basis points, as 10- to 15-year terms widened by 10 to 12 basis points. The bulk of the activity was in 2- to 6-year terms.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance increased to $9.5 billion while call volume dried up completely. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Freddie Mac passed on its Reference note slot but has another one scheduled for this Thursday, April 7th. Fannie Mae also has a Benchmark slot scheduled for Tuesday, April 5th. There are no major issuances scheduled for next week.
Senior Vice President, Investment Strategies