August 10, 2020
Treasury yields continued their steady march lower last week before turning higher in the latter half of the week, particularly following the better-than-expected July jobs report on Friday. Government debt yields set new record lows on Tuesday all the way out to the recently rebooted 20-year note but ended the Friday trading session 2 to 4 basis points higher week-over-week for 2- to 10-year notes. Unable to reach a compromise with Democrats on a new pandemic relief bill, President Trump signed several executive orders over the weekend that, among other things, extended the temporary federal unemployment benefits. Both agency bullets and callables mostly tightened on the week. This week the economic calendar is relatively light, and the highlight will again come on Friday with the July retail sales figures. The market will likely continue to monitor the slowly improving virus data and look to Congress to come to an agreement on a stimulus package, an action with perhaps renewed urgency following the president’s actions over the weekend.
Spreads on agency bullets were mostly tighter on the week, specifically in the belly of the curve. Bullets with maturities of 2 to 5 years tightened by approximately 2 to 3 basis points. Callables were also tighter on the week but the biggest moves came on the longer end of the curve, with 15-year maturities tightening by roughly 7 basis points. Spreads on 3-year maturities also tightened a couple of basis points. Internal activity in agency paper was particularly brisk last week, with customers largely buying callables across the curve. There was also an uptick in bullet purchases, specifically in 5-, 7-, & 10-year maturities. As highlighted in the charts below, spreads blew out considerably in March amid the flight to quality and the Fed cutting rates to near zero, but bullet spreads, particularly on the front end of the curve, have largely reverted to the historical mean. One would expect that, over time, bullets with longer maturities will likewise continue to tighten in towards pre-pandemic levels.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined to $8.4 billion while call volume picked up to $7.3 billion. Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae announced a $4.5 billion 10-year Benchmark note that priced at +40. The Federal Home Loan Bank has an issuance slot this Wednesday, and Freddie Mac has its next Reference announcement date next Wednesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP