Agency Update

February 16, 2021

It was a rather quiet week in the financial markets and Treasury yields ended the week higher, largely based on the Democrats’ plans for further stimulus and the resulting inflation implications.  With the Fed’s new flexible average inflation targeting framework combined with unprecedented fiscal stimulus, it is no huge surprise that the slope of the yield curve is at its steepest level in 4 years.  While the broader market appears focused keenly on inflation, last Wednesday Fed Chair Powell reconfirmed the importance of a “patiently accommodative monetary policy stance” and made it clear that the slack in the labor market is far too great to consider tightening policy anytime soon.  Click here for the full text.  The 10-year yield ended Friday at 1.21%, up another 5 basis points on the week, and the 5-year yield increased by 3 basis points on the week to 0.49%.  Treasury yields are up further this morning, marginally on the front end and by 4 to 5 basis points for 5- and 10-year notes.  Agency bullets tightened for longer maturities while callable spreads were largely unchanged.  This week’s calendar picks up a bit and is highlighted by January retail sales and the FOMC meeting minutes, both scheduled for Wednesday.

Last week agency bullets tightened versus Treasury notes and bullets continue to notch new records for tightest spreads in history.  Bullets on the front end of the curve were largely unchanged, likely because they have run out of room to tighten any further.  To put it in perspective, 3- and 5-year bullets are trading only 1-2 basis points over sovereign notes.  Spreads on 10-year bullets tightened by an aggressive 4 basis points to end the week at +7.  From 2016 to 2019, the lowest weekly closing spread on 10-year bullets was approximately 20 basis points.  As can be seen in the chart below, 10-year agency bullet yields are essentially unchanged since the end of last July despite the 10-year yield being up nearly 70 basis points over the same time.  The Vining Sparks trade desk continues to cite limited supply and still strong demand as the impetus behind the moves in spreads.  Callable spreads were again little changed regardless of term or structure.  The bulk of the internal trade activity last week involved callables and step-ups in the 5- to 10-year portion of the curve.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance increased to $12.8 billion while call volume dipped to $5.5 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.

The Federal Home Loan Bank passed on its Global slot last week just as it has since last October.  This week Freddie Mac has a Reference issuance slot on Thursday, and Fannie Mae has a Benchmark date next Wednesday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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