Agency Update

December 7, 2020

Treasury yields turned higher last week and the yield curve steepened, leaving the 2s-to-10s spread at its widest weekly closing level in more than 3 years.  The market sold off some early in the week following the news that a bipartisan group of lawmakers unveiled the latest (doomed to fail in the Senate) stimulus package, and on Friday the rather weak November jobs report sent Treasury yields even higher given the renewed urgency to get a stimulus deal done.  Agency bullets and callables both tightened with the selloff.  This week’s economic calendar is relatively light and the market will likely keep its focus on stimulus negotiations in Washington.  With only two full weeks before the end of the year, look for bond portfolio managers to finish whatever type of repositioning might be needed going into 2021.  While gains are easy to come by right now, also consider taking losses to improve earnings going forward.

Agency bullets tightened versus Treasurys last week and bullet spreads across the curve are essentially back to February levels.  Given the thin supply in bullets right now, spreads are not likely to go higher over the near term.  Callables also tightened on the week, modestly in the belly of the curve but by approximately 5 to 8 basis points for 10- to 15-year maturities.  Trading activity last week was highlighted by callable buyers in the 8- to 10-year part of the curve.  After moving mostly 2-year lockout paper over the last month or so, funding levels have moved and the desk now sees more relative value in callable paper with 6- to 12-month lockouts.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance was halved to $6.3 billion and call volume also declined to $3.0 billion.  Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.

Last week Freddie Mac announced a $3 billion 3-year Reference note that printed at +6.5.  Today Fannie Mae has a Benchmark slot but, as of this writing, has not made an announcement yet.  The FHLB has a Reference note issuance date this Wednesday, and the final major issuance slot of the year comes next Wednesday with Freddie Mac’s last Reference note slot.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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