Agency Update

February 24, 2020

After a relatively quiet week in the bond market the previous week, the COVID-19-led flight-to-quality sent safe haven assets screaming higher last week.  Treasury yields ended the week 7 to 12 basis points lower, and the yield curve is now basically either at the all-time lows or at the lowest level since 2016.  The yield curve ended the week with the 2s-to-10s spread down to only 11 basis points, its flattest spread since October, and the market is now fully pricing in 2 25 basis point rate cuts by year-end 2020.  Agency bullets and callables both widened on the week.

Intermediate and longer agency bullets continued their recent widening streak last week, but still very close to their 12-month averages.  Callable agencies also widened with the rally, but the amount of call volume seen within the last year should be enough to make callable buyers wary.  This is particularly evident given that since most depositories’ primary interest rate risk exposure is to falling rates.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance and call volume were each just below $8 billion.  Callable owners can certainly expect elevated call volume in their higher coupon issues over the near term.

Last Wednesday the Federal Home Loan Bank announced a $2 billion 3-year Global note last week that priced at +6, its first Global issue since a 2-year note in December.  Fannie Mae has an issuance date next Tuesday, February 25th.  Freddie Mac has another Reference note issuance slot the following week on March 5th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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