Agency Update

December 16, 2019

Last week was a turbulent one in the financial markets, with much of the volatility being driven by news on the trade front.  The biggest moves came in the latter half of the week when it was announced that U.S. negotiators reached a phase-one deal with China, which caused a sharp bond market selloff, only to reverse course on Friday and give back much of the yields picked up the day before.  After all the ups and downs, Treasury yields ended the week nearly where they started, as 2- to 10-year Notes finished the trading session Friday down 1 to 2 basis points.  Agency bullets tightened, particularly on the longer end of the curve.

After having moved very little in recent months, last week bullets tightened in versus government debt.  While the most significant moves came on the longer end of the curve, it is likely only because bullets cannot get much tighter on the front end.  In some cases, agency debt with very short maturities is trading on top of or inside of Treasurys, although that is likely at least partially due to trade costs and commissions.  As mentioned in previous weeks, agency bullets would make attractive sale candidates for portfolio managers looking to harvest gains or do portfolio extension swaps as year-end approaches.  For bullet buyers, spreads do not reach double digits until beyond the 5-year part of the curve.  Callables were mostly unchanged last week and spreads still appear relatively tight given the fact that callables are trading near the tightest levels since early to mid-2018 for most terms and call structures.

The below table reflects last week’s total issuance and call activity across the primary GSE issuers.  Call volume declined to $2.6 billion last week, and callable owners can likely continue to expect elevated call volume in their higher coupon issues over the near term.  Total agency issuance volume fell to nearly $3.5 billion.

There were no major issuance dates last week.  This morning Freddie Mac declined to issue Reference notes on its final announcement date of the year.  Freddie Mac last issued Reference notes in June 2018.  The Federal Home Loan Bank has its final 2019 issuance slot on Wednesday.  There are no additional announcement dates for the remainder of the year.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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