Agency Update

January 21, 2020

Treasurys were largely rangebound last week and yields ended the trading session on Friday down slightly in the belly of the curve, falling by 1 basis point for maturities of 2 to 7 years.  Treasury yields are down further this morning, 2 to 5 basis points lower across the curve.  Agency bullet spreads were mostly unchanged.  With this week’s rather light economic calendar and lack of Fed-speak leading up to next week’s FOMC meeting, investors will largely focus on corporate earnings releases, developments out of Davos, and any updates on the deadly coronavirus in China.

Agency bullet spreads were mostly unchanged last week and remain extremely tight compared to historical averages.  As can be seen in the charts below, both 3- and 5-year bullet spreads are at less than one third of what they were last January.  While it is difficult to find relative value opportunities in bullets, the 8-year part of the curve still appears to be the most attractive given that spreads widen to approximately 25 basis points.  Spreads do not reach double digits until maturities of nearly 6 years.  Callable spreads were mostly unchanged last week, with modest tightening on the longer end of the curve.  Most callables continue to trade near the tightest levels of the past year.

The following table reflects last week’s total issuance and call activity across the primary GSE issuers.  Both call and issuance volume were high last week.  The amount issued totaled $11.4 billion, and total called amount was $10.6 billion.  Callable owners can likely continue to expect elevated call volume in their higher coupon issues over the near term.

Freddie Mac passed on its first issuance date of the year last Wednesday, just as it did in all of 2019.  The FHLB has a Global issuance slot tomorrow, January 22nd.  Freddie Mac has another Reference note announcement date next Tuesday.

Daniel Anderson

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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