April 9, 2018
Agency yields rose, albeit modestly, moving in lock-step with the increase in Treasury yields. Back and forth risk-off flows amid a chaotic round of trade threats between the U.S. and China was responsible for much of the price action in Treasuries. On the week, two-year Agency yields were unchanged at 2.35%, 5-year Agency yields increased 3 bps to 2.70%, and yields on 10-year Agencies climbed 3 bps to 3.07%.
Yield spreads for Agency bullets compared to Treasuries were relatively unchanged, while yield spreads on callables to Treasuries were mixed. Spreads tightened 1 to 2 bps for 5-year finals and widened 3 to 8 bps for 10-year finals. Looking ahead, expect for spreads to be more range bound, although 3-year spreads could tighten on the roll to a new Treasury 3-year.
Callable structures with 10-year finals, especially with 1- and 2-year lockout, continue to compare favorably to bullets because of 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:
Following Freddie Mac’s $250M 3-year re-opening last week, all eyes will turn to Fannie Mae’s April 11th benchmark note issuance slot. They have now passed 4 times in a row year-to-date. Even last year, when thy passed 13 times, FNMA never passed more than 4 times in a row. Its only new deal year-to-date was a $2B 5-year priced on January 19th.
Notable agency activity last week included:
These issues are coming at historically wide spreads over bullets and over negotiated levels, so consider these products when trying to pick up yield in Agencies. Also, in secondary issues, there’s still good opportunity in discounted callables at the wide end of the range where spreads are appealing over bullets.
Ricky Brillard, CPA
Vining Sparks, IBG