Agency Update

February 1, 2021

Last week was a busy one in the financial markets and Treasury yields ended the session Friday down 1 to 2 basis points across the curve.  The FOMC concluded their meeting on Wednesday and, as expected, left monetary policy unchanged.   The initial estimate for 4th quarter GDP came in at 4.0%, slightly weaker than expected.  Congress continues to debate further pandemic relief, and there are escalating fears over more dangerous COVID-19 variants spreading across the U.S. before vaccination distribution gets further underway.  Yet it was the equity markets that garnered most of the headlines, specifically in heavily shorted names like GameStop getting squeezed higher.  The bond market largely shrugged off the frenzy, and the 10-year yield ended Friday down 2 basis points to 1.07%.  The yield on the 5-year note declined by a basis point to end the week at 0.42%.  Agency bullets widened marginally while callables tightened, mostly on the longer end of the curve.  This week will be another busy one with the ISM indices released Monday and Wednesday, many Fed governors scheduled to speak, and the January jobs report on Friday.  The market is expecting a modest recovery on the jobs front after the negative print from December.

As has been written extensively in this space recently, agency bullets have been on a relentless tightening streak for months, but bullets finally widened somewhat last week.  Spreads on 3- and 10-year finals both increased by approximately a basis point.  For portfolio managers looking for liquidity, either to fund loan demand or as part of a cross-sector bond swap, agency bullets continue to make excellent sale candidates.  Callable spreads were little changed on the front end of the curve but tightened for longer maturities, with the biggest move being 15-year tenors tightening by 5 basis points.  Internal trade activity was mostly cash purchases with finals in the 4- and 5-year area of the curve.  As the yield curve has steepened over the past month, the agency trade desk continues to see a pickup in step-up activity, with the most active interest in the 10- to 15-year part of the curve.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $10.4 billion while call volume ticked up to $7.1 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.

Freddie Mac passed on its Reference note slot last week.  Fannie Mae has a Benchmark issuance slot this Wednesday, February 3rd.  The Federal Home Loan Bank has its next Global issuance date next Wednesday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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