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:
|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||–|
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:
- 24M of Federal Home Loan Bank callable in January and February 2019; maturing in 3 to 5 years
- 9.9M of Federal Home Loan Bank callable in August 2018 and February 2020; maturing in 5 to 10 years
- 6M of Federal Farm Credit callable in February 2018; maturing in 7 to 12 years
- 15.9M of Federal Farm Credit callable in February 2019; maturing in 3 to 4 years
- 17.6M of Federal Home Loan Mortgage Corporation callable in 2018 and 2019; maturing in 2 to 6 years
Ricky Brillard, CPA
Vining Sparks, IBG