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

Strategist

Vining Sparks, IBG

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120