February 14, 2022
There was no shortage of fireworks in the financial markets last week, and bond yields again moved to new post-pandemic highs as the curve continued to flatten. The biggest headline of the week came first thing Thursday morning as the CPI report came in hotter than consensus estimates. St. Louis Federal Reserve President James Bullard followed the hot inflation report by saying that he would prefer to see 100 basis points worth of hikes between now and July, and even floated the idea of an inter-market rate hike at some point in between given that there are only 3 FOMC meetings between now and then. Bond yields were already up on the inflation news but pushed even higher, with yields across the curve reaching new cycle highs before retreating on Friday after news of Russia’s potential imminent invasion of Ukraine hit the wire. Yields for 2- and 3-year maturities ended the week 19 basis points higher, and the 5-year settled at 1.94% after nearly touching 2.00% on Thursday. The bellwether 10-year yield rose as high as 2.06% following Bullard’s comments before ending the Friday trade session at 1.94%. With the yield curve flattening, the 2s-to-10s spread narrowed to only 43 basis points and is now the flattest since the summer of 2020, when the 10-year was trading at just above 50 basis points at the height of the pandemic.
Agency bullets widened modestly amidst the bond selloff while callables widened to a greater degree. The economic calendar this week is a bit lighter, with the latest retail sales report and the January FOMC meeting minutes both coming on Wednesday. Market participants will also be keenly awaiting further commentary from members of the Fed, with Bullard kicking off the week this morning with an appearance on CNBC. He mostly echoed his comments from last week, partially clarifying that he feels that the FOMC needs “to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation.” Outside of Bullard’s comments, most of the Fedspeak this week is scheduled for Thursday and Friday. It will be interesting to see if Bullard’s hawkish tone is balanced out with more dovish discourse from some other Fed members. The FOMC clearly does not want to appear as if they are behind the curve with regards to cooling today’s decades-hot inflation after describing price pressures as largely transitory until not that long ago. Time will tell.
Agency bullet spreads moved higher by about a basis point for 2-, 3-, and 10-year tenors, yet spreads on bullets remain close to zero out to 5 years. Callables widened by 2 to 4 basis points depending on the term and structure. Judging by the charts below, it looks as if bond yields have moved up in a near straight line to start the year. Since year-end, 2- to 5-year yields are up between ~60-75 basis points—obviously a big move in only 6 weeks. For depository investors looking to deploy some excess liquidity, yields have increased to the level that are now additive to many bond portfolios.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance increased to $1.8 billion while one $50mm callable issue was called. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the Federal Home Loan Bank passed on its Global issuance slot, with its next one scheduled for next Thursday, February 24th. Freddie Mac has a Reference note announcement date this Tuesday, February 15th, followed by a Benchmark issuance slot by Fannie Mae on Wednesday.
Senior Vice President, Investment Strategies