August 27, 2018
The curve flattened last week with the 2-year/10-year gap narrowing to 20 bps. An inverted yield curve is usually a harbinger of recession, so the flattest read in 11 years is notable. Agency yields were mixed on the week with modest increases on shorter-term maturities and small declines for longer-term maturities, resulting in a slightly flatter curve. For the week, two-year Agency yields moved higher by 2 bp to 2.69%, the 5-year Agency yield declined 2 bps to 2.80%, and yields on 10-year Agencies fell 3 bps to 3.18%.
Yield spreads for Agency bullets compared to Treasures were unchanged, while spreads on callables to Treasuries were mixed depending on the structure and call tenor. Spreads for callable Agencies tightened 1 to 2 bps with 2- and 3-year finals, but widened 3 to 4 bps on maturities of 10-years and greater. Callable structures with 10-year finals, compare favorably to bullets because of enhanced relative value on a yield spread basis (see graph below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last week, Freddie Mac forewent issuing reference notes on its August 20th announcement date. Freddie Mac has passed 7 times out of 10 slots year-to-date. The highlights of the agency coupon calendar in the upcoming week will be Home Loan’s announcement on Wednesday of any plans to sell global bonds.
Ricky Brillard, CPA
Vining Sparks, IBG