December 4, 2017
For the second consecutive week, Agency yields rose, moving in lock-step with the increase in Treasury yields. Ongoing strength in US economic data and raised prospects for tax reform resulted in higher US Treasury yields over the week. Two-year Agency yields increased 2 bps to 1.82%, 5-year Agency yields climbed 6 bps to 2.18%, and yields on 10-year Agencies were higher by 2 bps to 2.70%.
Yield spreads for Agency bullets and callables compared to Treasuries were unchanged for the week with the exception of 1-year bullets, which experienced a tightening of 1 bp. In the near term, expect agency note spreads to move in recent ranges, although 5-year spreads will probably continue to trade in a wider range than the shorter maturities. As seen below, Agency callables with 10-year finals are appealing from a relative value perspective as current spreads compare favorably to their 12-month averages.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||567,000,000||–|
|Federal Home Loan Banks||2,189,000,000||–|
|Federal Home Loan Mortgage Corp||1,940,000,000||–|
|Federal National Mortgage Association||–||–|
|Federal Agricultural Mortgage Corp||–||–|
Officials from the Federal Housing Finance Agency say they want Fannie and Freddie to keep between $2 billion and $3 billion to protect them against losses, but in exchange for this, officials from the Trump administration want to limit their market footprint through measures like tighter limits on loan sizes that they back. This seems ironic in light of the 7% increase in loan size limits announced last week. Fannie and Freddie are scheduled to pay the U.S. Treasury $7.7 billion by the end of December, and if FHFA director Mel Watt decides to withhold some money without getting approval from the administration, it could lead to a major conflict between President Donald Trump and the independent agency.
Last week, Federal Home Loan Bank, as expected, passed on its global bond issuance slot. It has now passed 13 times year-to-date versus 7 times in 2016. The highlights of the agency coupon calendar in the upcoming week will be Federal Home Loan Bank’s announcement today of any plans to sell global bonds and Freddie Mac’s announcement on Wednesday of any plans to sell reference notes.
Ricky Brillard, CPA
Vining Sparks, IBG