December 9, 2019
The yield curve steepened last week and pivoted around the 2-year mark. Yields on 1-year T-Bills ended the volatile week down 4 basis points while yields on 3- to 10-year Notes ended the session Friday up 3 to 6 basis points. The slope between 2- and 10-year Treasurys held around 20 basis points. Much of the trade activity seemed to center around conflicting trade news and the stronger-than-expected November jobs report on Friday. Agency bullets largely moved in line with government debt.
Bullet spreads have changed very little since the beginning of October and continue to trade near the tightest spreads since May. As mentioned last week, agency bullets would make attractive sale candidates for portfolio managers looking to harvest gains or do portfolio cleanup swaps as year-end approaches. For bullet buyers, the 6-year part of the curve looks to have the most value. For instance, 6-year TAPs are trading at roughly 17 basis points over 5-year Treasurys, whereas 5-year bullets are trading at 7 basis points over the 5-year. Most callable paper has appeared relatively rich for more than a month now, and last week callables tightened further versus Treasurys. Spreads remain at basically the tightest levels in more than a year for nearly all tenors and call structures. The most attractive callable paper, at least to this author, is still in the 8-year part of the curve. For instance, there is a Farm Credit issue offered at more than 80 basis points over the curve, at a steep discount, and yields more than 3.75% (223 basis point spread) to the 1-year call. For more details, please contact your Vining Sparks representative.
The below table reflects last week’s total issuance and call activity across the primary GSE issuers. Call volume nearly doubled to $6.1 billion last week, and callable owners can likely continue to expect elevated call volume in their higher coupon issues over the near term. Total agency issuance volume fell to nearly $4.0 billion.
Last week Fannie Mae passed on its final Benchmark issuance date of the year. There are no major announcement dates this week, and Freddie Mac and the Federal Home Loan Bank have their final 2019 issuance slots next Monday and Wednesday, respectively.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP