December 17, 2018
Treasuries sold off and the yield curve steepened slightly, two occurrences not seen in nearly a month on a week-over-week basis. Treasury Notes with terms of 2 through 5 years are trading at approximately equal levels, and as of this writing, 3-year Notes are trading at 1 basis point lower than 2- and 5-year Notes. Last week agency bullets tightened slightly versus Treasuries. Bullets with 3-year maturities were essentially unchanged at 2.82%, and 5-year bullet yields increased 3 basis points to 2.88%.
After widening out in recent weeks, last week agency bullets mostly tightened in versus government debt. Bullets with terms of 2 to 10 years tightened in by approximately 1 basis point. Bullets in the 5-year part of the curve are trading near 15 basis points above Treasuries. Despite having tightened in on the week, spreads remain near the wides for the year and bullets still appear attractive on a relative value basis. Callable bonds also tightened in versus Treasuries. As highlighted in the graph below, spreads on 5-year callables with lockout periods of 3 to 12 months are near the highs of the year, while spreads on 2-year lockout periods have tightened in considerably in recent weeks and appear rich compared to less-structured paper.
The following table reflects last week’s total issuance and call activity across GSE issuers:
The Federal Home Loan Bank passed on its issuance slot last Tuesday, and Freddie Mac passed on its issuance slot on Thursday. The agency bullet calendar is now closed for the year. Last week Freddie Mac issued $2 billion in 6-month daily reset SOFR-linked notes at +3 basis points.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP