Agency Update

December 10, 2018

Sovereign debt continued to rally last week, particularly further out the curve, and the intermediate portion of the yield curve inverted for the first time in more than a decade.  Treasury Notes with terms of 2 and 3 years are trading at approximately equal yields and one basis point greater than 5-year Notes.  Agency bullets slightly underperformed Treasuries last week.  Agency bullet yields for maturities of 2 to 5 years fell by 5 to 10 basis points.  Yields on 3-year bullets fell to 2.83%, and 5-year bullet yields declined to 2.85%.  As highlighted in the chart below, the agency curve better maintained its steepness in comparison to the Treasury curve.

Agency bullets continued to widen out versus Treasury debt, seemingly due to rather weak demand.  Last week bullets with terms of 2 to 10 years widened out by approximately 2 basis points. Some bullet issues in the 5-year part of the curve are trading at spreads versus Treasuries in the high upper teens.  Several months ago, the same securities were trading at single-digit spreads over Treasuries, so investors currently in the market can take advantage of what appears to be an attractive buying opportunity.  Callable bonds across the curve generally widened out as well, depending on term and structure.  Given the bond market rally over the past several weeks, most agency yields are essentially at the same levels as they were in mid-September.

The following table reflects last week’s total issuance and call activity across GSE issuers:

Freddie Mac passed on its final issuance date of the year last Wednesday.  Last week the Federal Home Loan Bank priced their second issue of SOFR-indexed floating rate bonds with 9- and 18-month final maturities.  The Federal Home Loan Bank has its next issuance slot this Tuesday, December 11th, when it can announce plans to issue Global Securities.  This Thursday, December 13th, is the next announcement date for Fannie Mae to issue Benchmark securities.  Those are the final issuance dates of the year for Fannie Mae and the Federal Home Loan Bank.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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