December 6, 2021
While the new Omicron variant received its fair share of headlines last week, it was the Fed that dominated the bond market news cycle. In testimony before Congress last week, Jay Powell said that it would be appropriate to conclude tapering asset purchases a few months sooner than they had announced at the FOMC’s November meeting last month, which would mean they could finish tapering by March instead of June. For months Chair Powell and the FOMC had described the current hotter inflation as “transitory”, but last week he even went so far as to say that “it’s probably a good time to retire that word” given the broad and persistent price pressures as the economy reopens more fully. The yield curve pivoted in a flattening manner, with the 10-year yield falling by 9 basis points to 1.35% while the 2-year yield increased by 9 basis points. This morning yields for 2- to 10-year maturities are up 3 to 5 basis points, partially reversing some of the moves on the longer end of the curve last week.
Agency bullets widened last week for the first time in months, moving spreads back to positive territory for notes 2 years and longer. Bullets with 5-year maturities widened by the most at approximately 3 basis points (up from near zero). Callables with 5- to 15-year maturities widened by 4-5 basis points. The calendar this week is a bit on the lighter side and features the October JOLTs report on Wednesday followed by the November CPI inflation report on Friday. The market would certainly welcome more concrete information regarding the Omicron variant, but early reports point to milder symptoms compared to the Delta variant.
Agency bullet spreads were unchanged on the week and remain near all-time lows. Because bullet spreads are practically zero out to 5 years, most would-be bullet buyers are purchasing Treasury notes instead. Spreads on agency callables were practically unchanged last week except for 15-year terms, which tightened by about a basis point. Given the moves in Treasurys last week with yields on shorter-term maturities up, purchase activity was concentrated on the front of the yield curve as one would expect.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance declined to $4.1 billion and call volume was basically dipped to $93 million last week. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its Benchmark slot, its final one of the year. Freddie Mac has a Reference issuance date this Thursday, December 9th. The Federal Home Loan Bank has its final issuance slot of the year next Thursday, December 16th.
Senior Vice President, Investment Strategies