February 12, 2018
Agency yields moved lower this week, with most of the movement occurring in shorter term finals, resulting in a steeper yield curve. Two-year Agency yields fell 10 bps to 2.09%, 5-year Agencies declined by 9 bps to 2.58%, and yields on 10-year Agencies decreased by 1 bp to 3.18%
Yield spreads for Agency bullets compared to Treasuries contracted by 2 to 3 bps, while yield spreads on callables versus Treasuries were mixed. Spreads tightened 3 to 6 bps for 2- and 3-year finals and 10 to 14 bps for 10- and 15-year finals. Contrarily, structures with 5-year finals widened 4 to 14 bps. As seen below, Agency callables with 5-year finals are appealing from a relative value perspective, as current spreads compare favorably to their 12-month averages.
Currently, discount callable Agency bonds including step-ups offer greater yields than do bullets of similar terms, and, in a declining rate environment, the potential for more price appreciation than callables priced at or near par. While the yield pickup versus non-callable issues comes with the risk of potential early redemption if yields decline, the yield boost from booking unamortized discount at the call date offers a very meaningful compensation.
The following table reflects last week’s total issuance and call activity across GSE issuers:
|Federal Farm Credit Banks||277,000,000||–|
|Federal Home Loan Banks||193,000,000||–|
|Federal Home Loan Mortgage Corp||65,000,000||516,500,000|
|Federal National Mortgage Association||–|
|Federal Agricultural Mortgage Corp||–|
On Wednesday, Federal Home Loan Bank priced a $3 billion 2-year global bond due on February 11, 2020. It was its first new benchmark-type issue since October 2016. The highlight of the agency coupon calendar in the upcoming week will be Freddie Mac’s announcement on Wednesday of any plans to sell reference notes.
Notable activity last week included:
- 16.5M of Federal Home Loan Bank step-ups callable in August 2018; maturing in 5 years
- 10M of Federal Farm Credit Bank callable in February 2019; maturing in 10 years
- 22.5M of Federal Home Loan Mortgage Corporation callable between March and August 2018; maturing in 3 to 5 years
Ricky Brillard, CPA
Vining Sparks, IBG