August 21, 2017
After declining two weeks ago, Agency yields were relatively stable and experienced a modest improvement last week. Two-year Agency yields increased 1bp to 1.38%, 5-year Agency yields climbed 2 bps to 1.85%, and yields on 10-year Agencies were higher by 1 bp to 2.55%.
For the third consecutive week, yield spreads for Agency bullets and callables compared to Treasuries were unchanged.
Currently, there is significantly more spread between the Bermuda structure and the one-time structure. For investors that can handle the optionality, callables are attractive on a spread basis, as yield spreads have remained higher over the recent lows reached in July (see graph below), and the Bermuda structure in particular represents opportunity.
The summer slowdown was not isolated to corporates, mortgages, and preferreds, as the rate rally put a damper on new Agency issuance last week. Meanwhile, agency redemptions consisted of 81 issues called totaling $3.1 billion in paper.
Fannie Mae announced it would not utilize its August 16th benchmark notes announcement date. Federal Home Loan Bank has the next major supply slot with its global bond announcement on Wednesday. Federal Home Loan Bank will have another global bond announcement on September 6th.
Last week investors largely focused on the following:
- Callable activity on the three- through four-year part of the curve
- Swaps with accounts coming out the front end and extending out the curve to the 5- to 7-year sector
Ricky Brillard, CPA
Vining Sparks, IBG