Agency Update

April 6, 2020

Despite above-average volatility in financial markets, the bond market appears to have settled into its new trading range.  Treasury yields were little changed last week for notes with 2- to 5-year maturities, while the 10-year note declined a further 8 basis points week-over-week.  While 8 basis points in any week is not an insignificant move, that was actually the smallest week-over-week change in the 10-year note since mid-February, which just underscores how volatile the market has been as the financial world grapples with the impacts of the COVID-19 pandemic.  While the March jobs report released on Friday was worse than expected, it did not move the bond market significantly.  Bonds are selling off this morning and stocks are rallying on renewed optimism that newly reported coronavirus cases are beginning to slow, particularly in certain regional hotspots like Italy and New York, and Treasury yields are higher by 2 to 6 basis points across the curve.  There are few major economic releases on this holiday-shortened week—the March FOMC meeting minutes will be released on Wednesday, and Thursday will likely show another dismal week for initial jobless claims.

Diminished supply and a stronger bid led to agency bullets tightening last week while callables were mixed.  Agency bullets tightened the most on the front end of the curve, by approximately 5 to 6 basis points for 2- to 3-year maturities, while 5- to 10-year bullet spreads were little changed.  Despite trading tighter in recent weeks, agency bullets are still at basically the widest spreads in nearly a decade.  The largest moves in the callable space was on the front end of the curve, and mostly for less-structured calls.  For example, callables with 2- to 3-year maturities and 3-month lockouts widened by approximately 21 to 25 basis points.  Callables with maturities of 5 years and longer, and nearly regardless of call structure, saw minimal changes on the week.  The below charts highlight the fact that, despite Treasury yields declining since mid-February, the widening on callables has been a partial offset for new purchases.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $7.8 billion while call volume declined to $4.6 billion.  Callable owners can continue to expect basically 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.

There were no major issuance dates scheduled last week.  Today Fannie Mae has a Benchmark issuance slot but it has not been announced yet.  Freddie Mac has its first issuance slot in nearly a month this Wednesday the 8th.  Next week the Federal Home Loan Bank has an issuance date on Tuesday, April 14th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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