December 14, 2020
Between the lack of additional stimulus from Congress and record high coronavirus cases, hospitalizations, and fatalities in the U.S., the bond market rallied and Treasury yields declined throughout the week. After reaching the highest yield since March the week before last, the 10-year yield fell 7 basis points and ended last week at 90 basis points. Even the front end of the curve was not immune, and the 2-year yield declined to 12 basis points, only about a basis point above the low reached at the end of July. The moves in the bond market come as the first vaccines are distributed in the U.S. and in Europe—bond buyers seem to be telling the rest of the market that reaching herd immunity will be a lengthy process, and first everyone must get through what looks to be a challenging winter. Spreads on agency bullets were little changed while callables tightened. This week’s economic calendar is highlighted by the November retail sales report out on Wednesday followed by the FOMC policy decision that afternoon. While there are no changes expected to their overnight target rate or asset purchase amounts, they could make adjustments to their forward guidance or the target durations on Treasury purchases.
Agency bullets largely moved in line with Treasurys last week and bullet spreads across the curve remain at levels last seen before the pandemic. Callables continued their recent tightening streak last week, with spreads on maturities of 2 to 10 years declining by approximately 1 to 2 basis points. Internal trading activity last week was all over the board, from callable buyers in the 5- and 15-year parts of the curve to a large 10-year Benchmark purchase. Needless to say that there are a lot of dollars in search of government paper, and even with the heavy issuance of this year, the strong bid for agency product means spreads are likely not going meaningfully higher over the near term.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance was basically flat at $6.1 billion while call volume nearly doubled to $5.9 billion. Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on their Benchmark slot. This week the final major issuance slot of the year comes on Wednesday with Freddie Mac’s last Reference note slot of 2020.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP