December 18, 2017
Agency yields were mixed this past week as the curve flattened following data releases and tax reform updates. The Fed delivered its third rate hike of 2017 and maintained its projections for three rate hikes in 2018. The Summary of Economic Projections showed upgraded forecasts for GDP growth and lower unemployment, but no change in core inflation. For the week, two-year Agency yields increased 4 bps to 1.89%, 5-year Agencies climbed 1 bp to 2.22%, and yields on 10-year Agencies were lower by 3 bps to 2.69%.
Yield spreads for Agency bullets compared to Treasuries were unchanged, while yield spreads on callables to Treasuries were mixed. Spreads tightened 2 to 6 bps for 3- and 5-year finals and widened 1 to 6 bps on the short end of the curve (2-year finals). Structures with 10- and 15-year finals saw contraction on shorter call tenors and widening on longer call tenors. In the near term, expect agency note spreads to move in recent ranges, with the 5-year spread moving in a broader range than the shorter maturities.
Callable structures with 2-year finals compare favorably to bullets because of the enhanced relative value on a yield spread basis (see graph below).
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||266,000,000||50,000,000|
|Federal Home Loan Banks||675,000,000||45,000,000|
|Federal Home Loan Mortgage Corp||185,000,000||65,000,000|
|Federal National Mortgage Association||–||35,000,000|
|Federal Agricultural Mortgage Corp||21,500,000||14,000,000|
Last week, Freddie Mac, as expected, passed on its final reference note supply slot of the year. The highlight of the agency coupon calendar in the upcoming week and the last announcement for the year will be Fannie Mae’s announcement on Wednesday of any plans to sell benchmark notes. Fannie Mae has not used a December slot since 2009.
Items to focus on this week include:
- Two-and-a-half-year callable paper at a discount with call protection
- Auction paper, especially prints out past five years, which are cheap versus LIBOR
- Agency bullet structures in the belly of the curve
Ricky Brillard, CPA
Vining Sparks, IBG