December 13, 2021
Market jitters seemed to ease last week after a couple of weeks of heightened volatility. On Friday the latest CPI release showed headline inflation at 6.8% year-over-year, its hottest print since 1982, with core inflation only slightly milder at 4.9%. The inflation release is a timely one given that the FOMC holds its final meeting of the year this week. In recent weeks Chair Powell appeared to retire the word “transitory” with regards to current price pressures, and he announced that it would be appropriate to accelerate their taper timeline to give themselves flexibility to begin raising rates as early as next spring. At their meeting this week the FOMC is expected to announce that they will double the pace of taper, which would mean completing the taper process by March rather than by June. The market is now pricing in a near 70% likelihood of a rate hike in May 2022, a much sooner liftoff than the market anticipated only a few months ago. Bond yields increased across the curve, with the 2-year increasing by 7 basis points, while 3- to 10-year Treasury yields increased by 12 to 14 basis points.
After spreads moved very little for several months, agency bullets widened for a second consecutive week last week. Bullets with 5-year maturities are now trading as wide as 4 basis points, up a basis point last week and up from near zero spreads only a few weeks ago. Callables across the curve widened by a couple of basis points, seemingly regardless of term or structure. The Fed concludes their December meeting this Wednesday, the same day the November retail sales report is scheduled for release. Further clarity on the Omicron variant would also be welcome, but anecdotal reports so far seem to point to relative mildness of symptoms.
Agency bullets widened for the second week in a row for maturities of 5 years and longer. Roughly one year ago, 5-year bullets traded at approximately 6 to 8 basis point spreads to Treasurys before tightening to only 1 basis point by the end of March. Those moves have been partially reversed in recent weeks, with 5-year bullets widening to approximately 4 basis points. Bullets with 10-year maturities now trade at spreads of ~15 basis points for the first time since last January. Agency callables widened by two basis points across the curve last week. As can be seen in the chart below, yields on 5-year callables have increased to ~1.50% after trading near 1.00% for nearly half a year.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined to $3.6 billion and call volume more than doubled to $245 million last week. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Freddie Mac passed on its Reference slot just as it has all year. The Federal Home Loan Bank has its final issuance slot of the year this Thursday, December 16th. Freddie Mac has one more issuance date for the year next Tuesday, December 21st.
Senior Vice President, Investment Strategies