Agency Update

January 10, 2022

Bond yields surged higher last week as market consensus appeared shift toward pricing in an additional 25-basis point rate hike over the next couple of years as judged by how Treasury yields increased in just a week.  The 2-year yield moved higher by 13 basis points while 5- and 10-year yields jumped by a full 24-25 basis points, the biggest weekly increase in more than two years.  While both ISM indices turned lower in December and the nonfarm payrolls report released on Friday came in weaker than expected, the unemployment rate fell to 3.9%, the labor market looks increasingly tight, and inflation remains near a 40-year high.  Given the current economic outlook, it is no huge surprise that the market believes the Fed can raise rates and begin to unwind their swollen balance sheet (at least to some degree) more quickly in this tightening cycle versus the previous one.  That was proposed by several Fed members according to the December FOMC meeting minutes from last week.  Thus, the meaningful move up in rates, which are higher so far this morning by another few basis points to start the week.

Agency bullet spreads were little changed last week while callables tightened amid the broader selloff, particularly on the longer end of the curve (more to follow below).  Turning to the calendar this week, the December CPI report is scheduled for Wednesday, PPI on Thursday, and retail sales will be released on Friday.  The Senate Banking Committee also holds its haring on Fed Chair Powell’s renomination tomorrow (Tuesday).  The hearing itself will likely be mostly a formality but expect the Committee to pepper Chair Powell with questions about inflation and the Fed’s plans to fight the ongoing imbalances as the economy attempts to get to the other side of the COVID-19 pandemic.

While spreads on agency bullets were little changed last week, callable tightened, particularly for longer maturities.  Callables with 3- and 5-year maturities tightened by approximately 2 basis points, while 10- and 15-year maturities saw spreads decline by 8 to 10 basis points.  As is evident below, despite callables tightening modestly in the belly of the curve, absolute yields moved to cycle highs last week.  For depositories looking to deploy excess liquidity, now appears to be a good time to be putting cash to work.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers, with overall activity coming in rather light last week.  Total issuance plunged to $575 million while call volume was again paltry at only $71 million last week.  For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.

Freddie Mac passed on its first Reference note issuance slot last week, just as the Federal Home Loan Bank also passed on its Global slot.  Fannie Mae follows up this week with its first Benchmark slot of the New Year on Wednesday, January 12th.  The FHLB has another issuance date next Wednesday, January 19th.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks

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