August 19, 2019
Heightened geopolitical tensions, drama on the trade front, and weak economic data abroad captured the bulk of the headlines last week and sent bond yields falling further as a result. Treasury yields for 2- to 10-year maturities fell by 16 to 19 basis points on the week and are now down approximately 145 to 160 basis points from the cycle’s peak last November. Also sending jitters throughout the financial world was the fact the bond rally flattened the yield curve to the point that the 10-year yield fell below that of the 2-year for the first time since 2007, albeit briefly—the spread between 2s and 10s steepened to +8 basis points by the end of the trading session Friday. Yields on 3- and 5-year agency bullets each fell by 16 basis points and ended the week at 1.51-1.52%. As judged by Fed funds futures contracts, the market is currently pricing in 50 basis points of rate cuts by the October FOMC meeting and better than 50/50 odds of another rate cut in December.
Spreads for bullets were unchanged on the week while callables continued to widen. Spreads on callable bonds are now generally at the widest levels of the year, and less structured intermediate maturity securities are trading at spreads not seen in nearly a decade. However, with the Fed likely to cut overnight rates by at least a half a percentage point by the end of the year, and with overall momentum continuing to carry bond yields lower, more highly structured securities featuring longer lockout periods and/or onetime versus continuous calls are likely more appropriate for fixed income investors in the current rate environment.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume increased to $12.0 billion last week, nearly double the previous week, and holders of callable paper can likely continue to expect elevated call volume given how far rates have moved downward over the last 9 months. As mentioned in previous Sector Updates, portfolio managers can go to the Client Portal on the Vining Sparks website to view updated cash flow projections for any callable bonds that may be rolling off soon.
The Federal Home Loan Bank announced a $1 billion 5-year Global note that priced at +7.5 basis points last week. Fannie Mae has an issuance slot this Wednesday, August 21st, with a subsequent one next Wednesday.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP