Agency Update

February 10, 2020

The financial markets went through another wild week last week but, despite the strong bond rally Friday, Treasury yields ended higher by 8 to 9 basis points across much of the curve.  Unsurprisingly, much of the trade activity appeared to be in reaction to news on the novel coronavirus.  The yield curve remains inverted as the market continues to price in at least one Fed rate cut this year.  Agency bullets widened marginally while callables tightened in.  Treasurys are up again this morning and yields are down 1 to 2 basis points as of this writing.

Agency bullets steadily tightened from mid-2019 but in recent weeks spreads have moved a couple of basis points wider and are now at the widest levels since September.  Callable agencies mostly tightened last week after widening out in previous weeks.  As can be seen in the charts below, bullet spreads still appear relatively tight, particularly on the front end of the curve.  Vining Sparks customers have been active selling bullets into the strong bid and either extending out to the longer end of the curve or in other sectors.  Most callable buying of late has been in more highly-structured paper, particularly in issues with 1-year lockouts.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance was high last week at over $9 billion, above the $5.2 billion in call volume.  Callable owners can likely continue to expect elevated call volume in their higher-coupon issues over the near term.

The FHLB passed on its Global issuance date last Tuesday.  Freddie Mac has its next issuance slot this Wednesday, and the FHLB has another issuance slot next Wednesday, February 19th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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