August 26, 2019
Despite the heightened volatility, Treasury yields ended the week mostly unchanged across much of the curve, with yields on 3-month bills and 2-year notes moving the most meaningfully. Yields on 3-month bills rose by 9 basis points on the week while 2-year notes finished Friday up 5 basis points. While investors had been eyeing Fed Chair Jay Powell’s speech in Jackson Hole on Friday, it was President Trump and his digital megaphone that moved the financial markets the most significantly on Friday after he unleashed a Twitter tirade lambasting China and the Fed. Bonds rallied sharply in response after selling off earlier in the week. Yields on 3-year bullets increased by 2 basis points while 5-year agency bullets were basically unchanged and they ended the week at 1.52-1.53%. As judged by Fed funds futures contracts, the market is still pricing in a 25 basis points cut at the September FOMC meeting and better than 60% odds of another rate cut in October, with a 3rd December cut still on the table.
Spreads for agency bullets have not changed materially over the past several weeks. Callables have widened in recent weeks but spreads did not move much last week. Spreads on callable bonds remain generally at the widest levels of the year, and shorter lockout callables are trading at multiyear high spreads. It bears repeating, though, that with the Fed likely to cut overnight rates by at least a half a percentage point by the end of the year, bullet type structures or securities featuring longer lockout periods and/or European versus American and Bermudan call types 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 dipped slightly to $11.3 billion last week but was still very high compared to weekly call activity so far this year, and holders of callable paper can continue to expect elevated call volume given how far rates have moved downward since last November. 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.
Fannie Mae passed on its issuance slot last Wednesday but has another announcement date this Wednesday, August 28th. There are no major issuance announcement dates next week for the primary GSEs. Last week the Federal Home Loan Bank issued a $3.25 billion 6-month SOFR-index floating rate note and a $3.75 billion 12-month note. The notes priced at +1 and +3, respectively. The Federal Home Loan Bank has now issued $108 billion of SOFR-linked securities after first issuing notes tied to SOFR this past November.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP