January 14, 2019
The first full week of the year saw Treasury yields increase for maturities 2 years and out, and the yield curve resumed its recent flattening trend. The yield curve remains inverted from 1 to 7 years. Last week agency bullets tightened in slightly for shorter-term maturities. Bullet yields for 3-year maturities increased 2 basis points to 2.61%, and 5-year bullet yields increased by 3 basis points to 2.70%.
Agency bullet spreads were somewhat tighter on the front end of the curve but spreads on intermediate and longer-term maturities remained near the recent wide marks. Bullets in the 5-year part of the curve are still trading near 17 basis points above Treasuries, approximately double the upper single digit spreads from the first of October and near the highest level since early 2016. Additionally, spreads widen fairly significantly past the 5-year point of the curve to near 30 basis points for 6- and 7-year maturities. The Treasury curve maintains some steepness between 5 and 7 years, adding an extra benefit for investing just past the 5-year point of the curve. More highly structured callable bonds tightened in considerably compared to Treasuries, as can be seen in the chart below. Also highlighted in the chart below, spreads on less-structured 5-year callables remain at the highs of the past 5 years and appear to be attractive relative to more highly structured product.
The following table reflects last week’s total issuance and call activity across GSE issuers:
Last week Fannie Mae announced issuance of $2.5 billion in 3-year Benchmark notes that priced at +8.5 bps. The Federal Home Loan Bank passed on its first Global issuance date of the New Year last Thursday. This week Freddie Mac has an issuance date on Wednesday, January 16th. Next Wednesday, January 23rd, is the next issuance date for the Federal Home Loan Bank.
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP