January 18, 2022
The selloff in Treasurys continued last week and the yield curve moved in a flattening manner, with 2- and 3-year yields climbing by another 11 basis points. The moves further out the curve were not quite as sharp, with 5-year yields moving higher by 6 basis points and the 10-year yield increasing by 2 basis points. This continued selloff comes as the Fed appears increasingly hawkish as it attempts to ready the market for the central bank to quickly shift from historic accommodation during the pandemic to tightening monetary policy to fight decades-high inflation. Even Lael Brainard, perhaps the most dovish member of the FOMC, said last week that “We do have a powerful tool and we are going to use it to bring inflation down over time,” and she acknowledged that the Committee has projected several rate hikes this year. A 25-basis point hike in March appears to be a near certainty at this point.
Agency bullet spreads were unchanged last week while callables continued to tighten amid the selloff in Treasurys. This week’s calendar is a bit lighter as the Fed enters its blackout period ahead of next week’s policy meeting. Market participants will likely be focused on corporate earnings season, which kicked off this morning. Bond yields are up further still this morning, higher by another 5 to 8 basis points across the curve.
Agency bullet spreads were little changed last week, with bullets trading at negligible spreads out to approximately 5-year maturities. Callables resumed their tightening streak, with many tenors tighter by 10 basis points or more over the past few weeks. Last week callables tightened by approximately 1 to 3 basis points across the curve, with the biggest moves occurring on the front end. As mentioned in this space last week, despite callables tightening modestly in recent weeks, absolute yields continued to move to cycle highs last week.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance increased to $2.5 billion and call volume increased to $534 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.
Last week Fannie Mae passed on its Benchmark issuance slot last week. This week the FHLB has an issuance date on Wednesday, January 19th. Freddie Mac has a Reference note issuance date scheduled for next Thursday, January 27th.
Senior Vice President, Investment Strategies