Agency Update

February 5, 2018

Agency yields benefited from the steepening Treasury yield curve in a week filled with a sizeable selloff across the curve brought on by a combination of events, including movements in the U.S. Dollar and expectations of a more hawkish Fed.  The Federal Open Market Committee left rates unchanged, as expected at Yellen’s final meeting, but guided for “further gradual increases” on a positive economic outlook and expectations that inflation will creep up this year, closer to the 2% target rate.  On the week, two-year Agency yields increased 5 bps to 2.20%, 5-year Agency yields improved 15 bps to 2.68%, and yields on 10-year Agencies were higher by 19 bps to 3.20%.

For the first time in five weeks, yield spreads for Agency bullets moved when compared to Treasuries.  The 2-, 3-, and 5-year bullets experienced a widening of 2 bps.  Yield spreads for callable Agencies widened as well with the larger movements occurring in shorter term structures.  Spreads widened 7 to 9 bps for 2-year finals and widened 10 to 12 bps for 3-year finals.  For investors that can handle the optionality, 3-year callables are attractive on a spread basis, as yield spreads have improved greatly over the recent lows reached last month (see graph below).


In terms of roll strategies, a 2-year Agency bullet offers 24 bps of roll compared to current 1-year bullets and a 3-year Agency bullet offers 20 bps of roll to current 2-year bullets.


The following table reflects last week’s total issuance and call activity across GSE issuers:


Issuer Issued Called
Federal Farm Credit Banks      495,000,000                                     –
Federal Home Loan Banks   3,113,000,000                                     –
Federal Home Loan Mortgage Corp   1,590,000,000                                     –
Federal National Mortgage Association      355,000,000                                     –
Federal Agricultural Mortgage Corp        12,000,000                                     –
Total   5,565,000,000                                     –


The highlight of the agency large bullet calendar in the week ahead will be FHLB’s announcement on Wednesday of any plans to sell global bonds.


Notable activity last week included:



Ricky Brillard, CPA


Vining Sparks, IBG

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