February 7, 2022
Treasury yields surged on Friday following a much stronger January jobs report than anticipated, clearly giving the Fed the green light to continue with their presumed plan to begin hiking rates in March. As the market has continued to price in more aggressive Fed policy moves, sovereign yields have jumped to new post-pandemic highs. Most of the yield curve moved higher last week by 14-16 basis points, with the 10-year topping 1.90% for the first time since January 2020. According to Fed funds futures, the market had been pricing in 4 25-basis point rate hikes in 2022, but in only the last couple of weeks the market has begun to price in 5 hikes this year, and on Friday the odds of a 6th hike jumped to better than 1-in-3. Given how tight the labor market appears to be and with inflation near 40-year highs, the FOMC appears to have the flexibility to tighten policy rather aggressively.
Agency bullet spreads were mostly unchanged last week and remain near all-time tights while callables widened amidst the bond selloff. The economic calendar this week is a bit slower, with the highlight coming Thursday as the January CPI report is released. Street consensus estimates a headline number above 7.0% and core CPI to near 6.0%. It will also be interesting to hear the messaging from the three Fed governors scheduled to speak mid-week, and how hawkish (or not) the FOMC consensus appears to be.
Agency bullet were unchanged last week, and bullets continue to trade right on top of Treasurys. Bullets out to 3-year maturities are currently trading at near zero spreads, while 5-year bullets yield only a couple of basis points higher than sovereign notes. Callable spreads increased by 1 to 3 basis points for most structures. The charts below illustrate how much yields have jumped in recent months after being rangebound through the middle half of 2021. And with the selloff in Treasurys, discount callables continue to garner attention from internal buyers. Keep in mind, though, that callables offer little or no protection to falling rates for asset sensitive depositories.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance fell to $1.5 billion while call volume dried up completely, likely for the first time in a couple of years. No huge surprise that call volume has dropped off given the jump in bond yields. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its second Benchmark slot of the year. The Federal Home Loan Bank has its next Global issuance slot this Wednesday, February 9th. Freddie Mac has a Reference note announcement date scheduled for next Tuesday, February 15th.
Senior Vice President, Investment Strategies