August 14, 2017
Agency yields declined across the curve last week, moving in lock-step with the fall in Treasury yields. A flight-to-safety attitude remains with investors considering geopolitical risks related to North Korea. Two-year Agency yields moved lower by 6 bps to 1.37%, 5-year Agency yields decreased 7 bps to 1.83%, and yields on 10-year Agencies declined 7 bps to 2.54%. Unlike other Agency bullet yields, the 10-year Agency yield remains less than its average over the past year (2.57%) by 3bps.
For the second consecutive week, yield spreads for Agency bullets and callables compared to Treasuries were unchanged. In the near term, expect Agency spreads to continue to be stable, remaining in their recent ranges. The best value can be found in auction paper maturing 5 years and out and deep discounted callables.
Agency redemptions consisted of 36 issues called totaling $1.47 billion with FHLMC making up $1.17 billion.
Dealer positions in GSE coupons rose $1.6 billion to $20.4 billion as of August 2nd according to Fed data. This is the highest level since $21.6 billion seen July 13, 2016.
Freddie Mac issued Dodd-Frank stress test results, which assess the company’s capital adequacy. Results as of December 31, 2016 under the severely adverse scenario showed substantial funding under the Preferred Stock Purchase Agreement.
Freddie Mac forewent issuing a reference note on its August 9th announcement date. The highlight of the Agency calendar in the week ahead will be Fannie Mae’s announcement on Wednesday of any plans to sell benchmark notes. Federal Home Loan Bank will have a global bond announcement on August 23rd.
Last week, trading activity in Agencies was elevated with active two-way flow mostly with the purchasing of bullets and secondary calls.
Ricky Brillard, CPA
Vining Sparks, IBG