Agency Update

February 8, 2021

Treasury yields moved steadily higher last week amid mixed economic data and the market pricing in better odds of Congress passing another stimulus bill, likely close to President Biden’s $1.9 trillion target.  While the ISM Services index came in much stronger than expected, and daily COVID-19 cases have essentially been halved in only a month, the Friday labor report showed that the jobs recovery has slowed to a near halt.  The 10-year yield ended Friday up 10 basis points to 1.17%, and the 5-year yield increased by 4 basis points on the week to 0.46%.  The 2s-to-10s spread ended the week at 106 basis points, the first time to close the week at 100+ basis points since May 2017.  Agency bullets mostly moved in line with Treasurys while callables widened.  This week’s calendar is a bit lighter and is highlighted by the January inflation report on Wednesday.  The market will likely remain focused on stimulus negotiations in Washington, vaccine distribution across the U.S., and whether equity indices can remain at record highs despite the uncertain near-term economic landscape.

Last week agency bullets mostly moved in lockstep with Treasury notes and spreads remain at all-time tights across the curve.  The Vining Sparks trade desk continues to cite limited supply with still strong demand as the impetus behind the spread tightening.  Callable spreads were again little changed for shorter maturities but widened for 5- and 10-year maturities by approximately 2 basis points.  The most relative value in the callable sector appears to be in maturities beyond 5 years.  Last week the trade desk was targeting the 7-year part of the curve with coupons at 1.00%.  There also appears to be strong demand for step-ups, with multiple accounts looking for custom designed structures and step schedules through reverse inquiries.  Should any readers have interest in doing the same, be sure to contact your Vining Sparks representative.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Total issuance fell to $3.2 billion while call volume declined to $6.1 billion.  Callable owners can continue to expect heavy call volume, and for specific dates and amounts, be sure to log in to the Client Portal on the Vining Sparks website.

Fannie Mae passed on its Benchmark issuance slot last Wednesday.  The Federal Home Loan Bank has a Global issuance slot this Wednesday, and Freddie Mac has an upcoming Reference issuance date next Thursday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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