Agency Update

August 5, 2019

Last week fixed income investors certainly had plenty to digest and the market encountered perhaps the most tumultuous several days of the year.  The most notable items were the Fed lowering the overnight target rate and Fed Chair Jay Powell’s subsequent press conference, inflation and employment data releases, and escalating trade tensions with China.  Treasurys rallied significantly on the week (and continue to do so this morning) and 2- to 10-year sovereign yields ended Friday lower by 14 to 22 basis points.  Yields on 3-year agency bullets declined by 15 basis points, and 5-year bullets fell by an even greater 19 basis points; they ended Friday at 1.75-1.76% (and are approximately 10 basis points lower as of this writing).   The yield curve continued its recent tightening trend and the spread between 2- and 10-year Treasurys fell by another 8 basis points, ending the week at a mere 13 basis points.

Spreads for both bullet and callable agencies widened with last week’s bond rally.  Both 3- and 5-year bullets are trading right at the average of the past 3 years, but absolute yields are basically at the lowest level in nearly 2 years.  Spreads on callable bonds widened even more than bullets and are now generally at the highest spreads in over a month.

The below table reflects last week’s total issuance and call activity across the primary GSE issuers.  Call volume declined to $4.2 billion last week but will likely pick back up given the market rally.  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.

Last week Freddie Mac passed on its issuance slot just as it has all year.  It last issued a Reference note in June of 2018.  The Federal Home Loan Bank has upcoming Global announcement date tomorrow, August 6th.  Freddie Mac has another announcement date on Thursday of this week and will not have another Reference note slot until September 24th.  The Federal Home Loan Bank has another announcement date next Wednesday, August 14th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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