Agency Update

August 24, 2020

The Treasury market rallied on what was a relatively quiet week.  The yield curve flattened, pushing longer-term yields lower after rising to the highest levels since June.  The housing market continues to show strength but much of the rest of the economic data points to a stable but slowing recovery.  Some of the timeliest data is the weekly jobless claims, which unexpectedly increased, although continuing claims declined to the lowest level since April.  Agency bullets tightened modestly while callables widened on the week.  There are a number of meaningful economic releases scheduled for the week, but the biggest headlines should come Thursday when weekly jobless claims are published, the next 2nd quarter GDP revision is released, and the Kansas City Fed’s annual policy symposium (normally held in Jackson Hole) kicks off.

Spreads on agency bullets were tighter on the week by a basis point or two for 1- to 5-year maturities.  Bullets have tightened to the point that spreads on maturities of 3 years or less are now either at or below pre-pandemic levels, and spreads on longer maturity bullets are nearing levels last seen in February and March.  For portfolio managers in need of liquidity and/or looking to harvest gains, agency bullets are a good place to start.  Callables went the other direction, underperforming Treasurys last week, and spreads out to 10 years were wider by 1 to 2 basis points.  Internal activity remains very high, particularly in the callable space, and the trade desk continues to see the most demand for call lockouts of 6 months to 2 years.  As highlighted in the charts below, spreads on callables have come down but are still above the relatively tight levels seen at the beginning of the year.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $14.3 billion while call volume declined to $10.1 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 Freddie Mac announced a $5.5 billion 3-year Reference note that printed at +12.5.  This week Fannie Mae has an issuance slot tomorrow (Tuesday).  Next week Freddie Mac has another announcement date on Wednesday, September 2nd.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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